The Union Cabinet has approved central government guarantee up to Rs 30,600 crore to back security receipts (SRs) to be issued by National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets.

The government guarantee, which will be valid for five years, can be invoked by NARCL for meeting the shortfall between the face value of the SRs and the actual realization upon resolution or liquidation. GoI's guarantee will also enhance liquidity of SRs as such SRs are tradable.

NARCL proposes to acquire stressed assets of about Rs 2 lakh crore in phases within extant regulations of Reserve Bank of India (RBI). It intends to acquire these through 15% cash and 85% in SRs.

NARCL has been incorporated under the Companies Act and has 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.

The government is also setting up an India Debt Resolution Company Ltd (IDRCL) to manage the Non-Performing Assets (NPAs). IDRCL is a service company/operational entity which will manage the asset and engage market professionals and turnaround experts. Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49% stake and the rest will be with private sector lenders.

The NARCL will acquire assets by making an offer to the lead bank. Once NARCL's offer is accepted, then, IDRCL will be engaged for management and value addition.

The new structure will incentivize quicker action on resolving stressed assets thereby helping in better value realization. Further, it will bring about improvement in bank's valuation and enhance their ability to raise market capital.

Capitalization of NARCL would be through equity from banks and Non-Banking Financial Companies (NBFCs). It will also raise debt as required. The GoI guarantee will reduce upfront capitalization requirements.

NARCL is intended to resolve stressed loan assets above Rs 500 crore each amounting to about Rs 2 lakh crore. In phase I, fully provisioned assets of about Rs. 90,000 crore are expected to be transferred to NARCL, while the remaining assets with lower provisions would be transferred in phase II.