Lenders are seeking clarity from the bad bank on drawing on guarantees

Mumbai: In a move that could delay the sale of bad debt to the National Asset Reconstruction Company (NARCL), lenders have decided not to transfer bad loans until clarity is provided on the conditions under which government guarantees can be invoked to close recovery gaps. People aware of the development told ET.

The topic has gained in importance because banks have never invoked a state guarantee in the past. Senior bank officials shared their concerns on the issue with NARCL management at a meeting last week, the people cited above said.

NARCL, an integral part of the government’s key bad banks initiative to clean up banking books announced in the FY21 budget, has yet to purchase a single bad loan from lenders.

A government guarantee is the biggest incentive for lenders to sell distressed loans to the NARCL.

Lenders have sought details on circumstances that might trigger a call on the guarantee, eligibility for call on the guarantee, conditional precedents for its call, and timeframes for payment.

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Under the proposed mechanism, NARCL would purchase loans from lenders under a 15:85 structure, with 15% of the consideration amount paid up front. The remainder of 85% would be in the form of Security Receipts (SRs), which would be repaid at a pre-determined price by the end of five years.

Last September, the Cabinet approved a proposal to provide ₹30,600 crore in government guarantees for NARCL-issued SRs. This guarantee can be called upon if the repayment of the SRs is insufficient.

Lenders are now seeking clarity on how this guarantee would work if there was a bottleneck in recovering bad loans. “Banks have never invoked the guarantees of state-owned institutions. Here we are talking about calling on state guarantees,” said a bank veteran who attended the meeting. “We have no precedent to follow,” he added.

The sale agreement between NARCL and the lenders must specify the terms of the guarantee call, potentially delaying the sale of non-performing loans.

NARCL has proposed to acquire around £2 billion of bad debt and its agent, India Debt Resolution Company (IDRCL), would be tasked with collecting it.

During last week’s meeting, the lenders also discussed issues related to management fees and the valuation of those accounts that could be sold.

NARCL informed lenders that they are in the process of submitting bids to purchase some of the loans on the original list issued a year ago. It has also circulated a new list of 17 accounts, including those of the two Srei companies and some Future Group companies. The second list of outstanding loans of ₹93,240 crore is intended to measure lenders’ interest in selling these loans.

rainbow papers, VOVL,

and GTL are some of the accounts in the first list.

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