What is the gist of the Bad Bank announcement?

The Bad Bank idea has been around for a long time, but the big question always was how much loans it would assume and what would be the government guarantee. The latter was the most important. The announcement has finally come on 16th September, with details of the government support. Nirmala Sitharaman has confirmed that the National Asset Reconstruction Company or NARCL, as the apex Bad Bank would be operational soon.

The modus operandi will be that PSU banks would be allowed to transfer up to Rs.200,000 crore of stressed assets to the Bad Bank. The Bad Bank will pay 15% of the value of the assets in cash and 85% in security receipts. The government will guarantee up to Rs.30,600 crore for security receipts issued by NARCL. However, such guarantees will automatically expire if not exercised in 5 years. There will be a guarantee fee payable to NARCL.