This topic has become important because banks have never used government guarantees in the past. Senior bank officials expressed their objection on the subject to the NARCL management in a meeting last week, the people mentioned above said.
NARCL, an integral part of the flagship bad bank initiative announced by the government in the FY 2011 budget to help clean up bank accounts, has not secured a single non-performing loan from lenders so far.
The government guarantee is the biggest attraction for lenders to sell stressed loans to NARCL.
Lenders have sought details on the circumstances that may have triggered the invocation of the guarantee, the eligibility to invoke the guarantee, the conditional precedents for its invocation and the timeline for payment.
As per the proposed mechanism, NARCL will obtain loans from lenders under 15:85 structure with an advance payment of 15% of the consideration amount. The remaining 85% will be as security receipts (SR) which will be redeemed at a pre-determined price till the end of five years.
Last September, the cabinet approved a proposal to provide ₹30,600 crore in government guarantee on SRs issued by NARCL. This guarantee can be invoked if there is a shortfall in the redemption of SR.
Lenders now want clarity on how this guarantee will work if there is a shortfall in recovery of bad loans. “Banks have never used guarantees issued by state-owned institutions. Here we are talking about implementing sovereign guarantees,” said a banking veteran attending the meeting. “We don’t have a precedent to follow,” he said.
The sale agreement between NARCL and the lenders will have to specify the conditions for invoking the guarantee, potentially delaying the sale of bad loans.
NARCL has proposed to take over bad loans worth around ₹2 lakh crore and its agent, India Debt Resolution Company (IDRCL), will be mandated to recover them.
During last week’s meeting, lenders also discussed issues related to management fees and valuation of these accounts, which can be sold.
NARCL informed the lenders that they are in the process of offering to get some loans from the initial list issued a year ago. It has also circulated a new list of 17 accounts, including two Srei companies and some Future Group companies. The second list, with outstanding loans of ₹93,240 crore, seeks to assess the interest of lenders in selling those loans.
Rainbow Papers, VOVL,
And GTL accounts for some of the first list.