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128 Economic Survey 2021-22

Box 1: NATIONAL ASSET RECONSTRUCTION COMPANY LIMITED

Various available resolution mechanisms, including Insolvency and Bankruptcy Code (IBC),
SARFAESI Act, Debt Recovery Tribunals, etc. have proved to be useful to certain extent, however
a large stock of legacy NPAs are yet to be resolved. In addition to this, while there are 28 ARCs
existing in India, due to limited capitalisation and low recoveries from existing portfolio, they are
better placed for acquiring only smaller value loans. In order to resolve the legacy NPAs and clean
up the banking system, the Union budget 2021-22 announced, “The high level of provisioning by
Public Sector Banks of their stressed assets calls for measures to clean up the bank books. An Asset
Reconstruction Company (ARC) Limited and Asset Management Company (AMC) would be set
up to consolidate and take over the existing stressed debt and then manage and dispose of the assets
to Alternate Investment Funds and other potential investors for eventual value realization.” In line
with this vision, two entities viz. National Asset Reconstruction Company Limited (NARCL), and
India Debt Resolution Company Limited (IDRCL) have been formed.

NARCL was incorporated on 7 July 2021 and has received a certificate of registration from the
th
RBI to commence the business of an Asset Reconstruction Company on 4 October 2021. NARCL
th
will majorly be owned by Public Sector Banks. Canara bank is the Sponsor with shareholding of
upto 12 per cent. NARCL would be capitalized through a combination of equity and debt from
various Banks and will have a finite life of 5 years. It may acquire stressed assets of about `2
lakh crore appox in multiple phases within the extant regulations of RBI under 15:85 structure,
implying that the consideration for acquisition will be 15 per cent in Cash and 85 per cent in
Security Receipts. IDRCL was incorporated on 3 September 2021 and will have minimum of 51
rd
per cent ownership of Private sector Banks and balance will be held by Public Sector Banks.
NARCL and IDRCL’s relationship will be defined through a debt management agreement where in
NARCL will aggregate and acquire the stressed assets and IDRCL, in turn, will provide stressed
assets management and resolution services to NARCL on an exclusive basis. The term of IDRCL
shall be co-terminus with that of NARCL. NARCL will acquire assets by making an offer to the
lead bank and the lead bank with an offer in hand (of NARCL) will run a ‘Swiss Challenge’ process
wherein other interested ARCs / Bidders will be invited to better the anchor offer made by NARCL.
Once NARCL is declared as a preferred bidder, NARCL shall initiate asset acquisition process and
acquire the assets in the underlying Trusts. After acquiring the assets, IDRCL shall prepare and
suggest the proposed restructuring / resolution plan, strategies, etc. for each Underlying Trust
Assets. Post the approval of resolution from NARCL, IDRCL shall also assist in implementation
of resolution. The assets acquired shall be resolved using existing resolution tools within the RBI
framework for ARCs.

Resolution mechanisms of this nature typically require a backstop from Government as it imparts
credibility and provides for contingency buffers. Globally, bad banks have been set up with
Government participation in the form of equity along with other regulatory dispensations, for
instance, Danaharta Nasional Berhad (Danaharta) in Malaysia or Asset Resolution Ltd (UKAR)
in UK. Therefore taking the precedence from international practices, in India, the government has
provided a guarantee of up to ` 30,600 crore, which will back Security Receipts (SRs) issued by