Which of the following is an entity that essentially helps banks to transfer the credit risk by buying their bad debts at mutually agreed value?

Solution

An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or bad assets from banks and financial institutions so that the banks can clean up their balance sheets. This helps banks to concentrate in normal banking activities. Banks rather than going after the defaulters by wasting their time and effort, can sell the bad assets to the ARCs at a mutually agreed value.   In the Budget 2021-22, the government has proposed setting up of an asset reconstruction company to clean up non-performing assets in the banking sector. Following this, in September 2021, National Asset Reconstruction Company Limited (NARCL or bad bank) was established and applied to RBI for license as an Asset Reconstruction Company (ARC) . NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution. PSBs will maintain 51% ownership in NARCL. SBI, Union Bank of India and Indian Bank have 13.27% stake each in NARCL while PNB has 12% stake.   In January 2022, NARCL received all approvals to commence operations and a total of 38 NPA accounts worth Rs.82845 crore have been identified for transfer to NARCL. This transfer will happen in a phased manner with banks agreeing to transfer 15 NPA accounts worth Rs.50,000 crore in Phase 1 by March 2022. NARCL intends to acquire these through 15% Cash and 85% in Security Receipts (SRs).   The Union Cabinet approved Central Government guarantee up to Rs 30,600 crore to back Security Receipts to be issued by National Asset Reconstruction Company Limited.