The Union Cabinet has cleared a proposal to provide Rs 30,600 crore government guarantee for security receipts issued by the National Asset Reconstruction Company (NARCL) as part of resolution of bad loans, Finance Minister Nirmala Sitharaman said on Thursday.
The proposed bad bank or NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts.
The government guarantee would be invoked if there is loss against the threshold value.
Briefing reporters on the decision, she said banks have recovered Rs 5.01 lakh crore of unpaid loans in the last six years. Of this, Rs 3.1 lakh crore has been recovered since March 2018.
Sitharaman's announcement is a landmark development and will help unclog the capital locked in the form of bad assets, India Inc said on Thursday.
The decision to provide sovereign guarantee for security receipts issued by NARCL was taken at a meeting of the Union Cabinet headed by Prime Minister Narendra Modi on Wednesday.
Chandrajit Banerjee, director general of CII, said that with this step, the initiative to clean up the books of the public sector banks which started with the asset quality review in 2015, has come a full circle.
"PSBs being saddled with high NPAs has been one of the key reasons behind their risk averseness towards lending, leading to poor credit growth.
"With the mechanism of bad bank expected to be functional soon, this major roadblock in the recovery of the credit cycle is removed," Banerjee said.
The announcement also re-assures the industry and investors that the government will keep on pushing ahead with bold reforms, he added.
PHDCCI president Sanjay Aggarwal said the government's approval to provide the guarantee is "highly appreciable" as it would result in faster resolution of non-performing assets in the country.
"This will unclog the capital locked in the form of bad assets that can be further leveraged for lending and spending on other priority areas.
"Since the guarantee is in a form of contingent liability, it will not lead to immediate cash outflow and therefore is unlikely to impact the fiscal position in near future.
"This initiative will boost investments and unleash the 'animal spirits' to strengthen high economic growth," Aggarwal said.
Ficci said it was a landmark development and signified the continuation of the reforms process in the banking sector of the country.
"The government has over the last few years adopted a well thought out strategy to address the challenges facing the banking sector on account of NPAs and with the setting up of the NARCL this process will get a major boost," it said.
Amongst the notable features attached to the setting up of NARCL, two areas stand out in particular, it said and that the backstop provided on the securitised receipts will ensure that a secondary market gets developed for such receipts and banks will be able to trade the same.