NARCL will have economies of scale with respect to bad asset aggregation | Business Standard News

Clipped from: https://www.business-standard.com/article/economy-policy/narcl-will-have-economies-of-scale-with-respect-to-bad-asset-aggregation-121091601351_1.html

The long overdue facilitation via NARCL comes at a time when banks’ appetite for credit needs to be supported, as the economy turns a corner

BanksIllustration: Ajay Mohanty

With nearly half of the fiscal year behind us, the economic recovery is increasingly looking on a more solid ground and offers confidence. The sequential momentum as economic activities open-up, vaccinations gather pace, personal mobility recovers and festive season commences, is expected to improve as we head into the second half of fiscal 2021-22 (H2-FY22). It is perhaps also the right time to start to look beyond FY22, in a bid to ensure that growth impulses remain intact over the medium-term horizon. It is in this spirit, that the working modalities of the Bad Bank, aka NARCL i.e. (National Asset Reconstruction Company Limited) announced by the finance minister needs to be seen in.

We have repeatedly argued that given that the Indian economy (and also the world economy) is emerging from a pandemic induced negative aggregate supply shock, the policy response needs to be one that reverses the impact of this shock.

The long overdue facilitation via NARCL comes at a time when banks’ appetite for credit needs to be supported, as the economy turns a corner. The receipt of the upfront 15 per cent cash to banks would ensure write-back of provisions as bank’s transfer non-performing assets of an indicative amount of Rs 900 billion in the first phase to the newly incorporated entity. This will incentivize incremental flow of credit towards productive and recovering sectors.

With the remaining 85 per cent guaranteed as sovereign backed security receipts, with an attached timeline of 5 years; Government has time-boxed the entire resolution process. This will help curb any unnecessary delays.

Big plus of NARCL over other private existing ARCs is that it offers the advantage of economies of scale with respect to aggregation of bad assets and therefore will facilitate improved valuation.

Working via the guarantee format, the security receipts are fiscal neutral and thus would not have any impact on Government fiscal deficit to GDP ratio in FY22 or beyond (it’s a contingent liability for the government though).

The erstwhile concern of the twin balance-sheet problem that constrained both investment demand and supply over 2015-2019 i.e., up to the onset of the pandemic, appears to be ebbing now. Over the last one year, pandemic notwithstanding, corporates have been able to maintain profitability and improve operating margins materially amidst reduction in costs. In a similar vein, asset quality of SCBs continues to improve gradually, with GNPA and NNPA ratio at 7.5 per cent and 2.4 per cent respectively as of March 2021 vs. 8.4 per cent and 2.9 per cent respectively as of March 2020. To quote the Reserve Bank of India “The banking system’s pre-pandemic capital and liquidity buffers have imparted resilience with some of them accessing the market for fresh capital, and PSBs having been allocated budgetary recapitalization” (Financial Stability Report, Jul-21).

RBI’s in-house macro-stress tests for credit risk in fact show that the bank’s GNPA ratio may increase to 9.80 per cent by Mar-22 under the baseline scenario and to 11.22 per cent under a severe stress scenario. Post NARCL, there could be some downside to these estimates; with aggressive effort by banks to recover the underlying non-performing assets leading to a cleaner balance sheet overtime. This in turn could also pave the way for improved valuations especially for Public Sector Banks, thereby helping Government’s medium-term agenda of divestment.

India is grappling with a rare straining of its internal economic balance, as manifested in elevated inflation pressures despite the presence of substantial negative output gap; while enjoying an improving external economic balance, with a benign current account accompanied by record high FX Reserves. The baton of restoring potential output is being effectively taken up by the Government. NARCL is one such spoke, in the neural network of reforms encompassing but not limited to the PLI scheme, National Monetization Plan and the National Investment Pipeline.

The authors Yuvika Singhal, Vivek Kumar and Shubhada Rao are with QuantEco Research. Views are their own.Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.

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