The National Asset Reconstruction Company (NARCL) will have maximum impact on loan books of Bank of India (BoI), Union Bank and Punjab National Bank (PNB), which will sell over 1% of their loans to the bad bank. According to rating agency Crisil, the bad bank, or NARCL, will lower the NPA level of banks by 20-25% over time.
However, the immediate impact on the bottom line will be limited as lenders who sell loans in the first phase will receive just around £270 million upfront cash payment as against the £9 billion of bad loans they sell to the corporation. Also, investing in the security receipts issued by NARCL will not increase the capital requirement of banks due to the government guarantee.
Of the £20 billion of bad loans to be transferred to NARCL, around £3.06 billion will be guaranteed for five years. NARCL will pay 15% of whatever amount the loans are valued at, in cash. The remaining 85% will be paid using security receipts. According to a Jefferies report, the government guarantee will keep the security capital neutral as without the guarantee banks will have to set aside funds towards provisions. A sovereign guarantee being risk-free does not attract similar capital requirements.
“For the guaranteed part, banks will recognise the value as an investment but that will not require any capital for 5 years as there is government guarantee. For non-guaranteed part, banks might not recognise value until actual recovery is made,” the Jefferies report said.