Financial Insights

Bad Bank launch may be delayed as RBI rethinks launch of the ‘dual structure’

The Bad Bank- an important measure announced in the last budget, could get delayed as RBI informed the lenders that it could not permit a ‘dual structure’ wherein one entity buys the bad loans and another reaches a resolution since there were no legal provisions under which it could agree with such a plan.

So what is bad bank? In order to resolve the issue of growing NPAs, Finance Minister Nirmala Sitharaman, had announced the formation of the bad bank. Here, the National Asset Reconstruction Company Limited (NARCL) would acquire stressed assets from commercial banks in different phases. Then the Indian Debt Resolution Company Limited (IDRCL) will resolve these assets and try to sell them in the market. The combines NARCL-IDRCL structure was the proposed bad bank.

The RBI has conveyed that under Securitisation and Resolution of Financial Assets and Enforcement of Securities Act (Sarfaesi), acquisition and resolution has to be housed under the same structure. After the RBI expressed its views, a new structure was proposed by the sponsors of NARCL under which the two aforesaid entities will have a principal-agent relationship. The NARCL will enter into a contract with IDRCL to outsource the resolution of NPAs.

The matters are currently under consideration, but action needs to be taken as soon as possible. Reason being the Financial Stability Report of the RBI according to which gross NPAs may increase to 9.5% by September 2022.

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