Government-Backed Bad Bank. NARCL

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News: The government has recently on 7th July set up a National Asset Reconstruction Company Limited (NARCL), under the management of Padmakumar Madhavan Nair who is an expert in handling stressed assets earlier working with State Bank Of India (SBI), to handle the dangerously rising Non Performing Assets ( NPA’s) of the banks. To start, the NARCL will first enquire into 22 defaulters’ accounts and their 89 thousand crores which has turned into NPA’s. This so-called Bad Bank is set up with a paid-up capital of over 74 crores. Read news Here.

Let’s understand in a simple way.

Previously what used to happen was, banks ( any commercial bank) would give loans to individuals or corporates with some interest rate on them and expect the borrower to return the loan amount in due time.

But, in some cases what happened is that, borrowers took loans from the banks and when it came to returning the loans, they could not pay off the debt due to various reasons. Now the banks started to worry about how they will recover the money. Because while giving the loan on a certain percent of interest the banks treated this loan as an asset. But now since 90 days have passed (90 days is the official number of days until which a loan is declared as NPA) and still no news about getting the loan back, the banks decide to rename the asset as a bad loan or a non-performing asset (NPA).

The banks have their own Recovery Unit (vasooli) but they are not that effective to get the loan amount from the defaulters. You must have seen private banks setting up recovery units to get the money back. This NARCL is nothing but a vasooli unit or a recovery unit backed by the government itself. But the work of this NARCL is nothing but recovering the bad loans and keeping a percentage with itself after negotiating with the concerned lender bank.

You may have a question that, even other commercial banks have such recovery units so what’s different in NARCL? Other commercial banks have many functions to perform like, the opening of bank accounts, lending loans, providing insurance, home, and car loans, etc. But this Bad Bank or NARCL is set to perform only one task of recovering the bad loans. Since it has only one task to perform it will have expertise in the same which will work efficiently and help India improve its Financial Position.

What are NPA’s?

Watch this video and know everything about NPA’s. Link here

For Upsc students in simple words, an NPA or Non Performing Asset is an asset that has stopped generating income for the bank for 90 days straight. The Reserve Bank Of India has implemented the 90-day rule to be in tandem with international practices.

Currently, in April 2021 India has more than Rs.3 trillion worth of NPA’s which is feared to rise due to the pandemic situation in the country. The gross NPA ratio is 8.3% compared with 8.6% in 2020.

Source: https://www.livemint.com/industry/banking/bank-npas-to-climb-to-9-6-9-7-in-fy21-as-covid-impact-surfaces-says-icra-11617624501504.html

https://www.business-standard.com/article/finance/govt-sets-up-asset-reconstruction-company-to-free-up-banks-for-credit-push-121071300262_1.html

Image: https://exampariksha.com/non-performing-assets-npa-banking-study-material-notes/

https://blog.ipleaders.in/management-non-performing-assets-npa/