Banks Transfer Jaypee Infratech’s ₹9,234 Crore debt to NARCL

Lenders have transferred the entire Rs 9,234-crore Jaypee Infratech loan to newly constituted National Asset Reconstruction Company (NARCL). This is the maiden acquisition by the government-promoted bad loan bank that was set a year ago. Under the arrangement, the NARCL will only acquire Jaypee Infratech loans that are currently held by 9 public sector banks. In a Swiss challenge auction held on October 27, 2022, in response to NARCL’s Rs 3,570-crore offer for the Rs 9,234 crore of debt, lenders failed to draw counterbids.

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Sixty-two per cent of the recognised claims against the distressed real estate developer are constituted of homebuyers, owners of fixed deposits, and private banks.

The government-sponsored National Asset Reconstruction Company’s (NARCL) pledge to only acquire Jaypee Infratech loans that are currently held by public sector banks (PSB).

NARCL’s offer:

According to NARCL’s offer, lenders would receive a 39 per cent recovery. The NARCL’s offer would amount to Rs 9,345 crore if the same offer of 39 per cent recovery is provided to all claimants. The IRP has admitted claims totalling Rs 24,211 crore.

What is National Asset Reconstruction Company (NARCL):

• NARCL is a special purpose asset reconstruction company for taking over the large value NPA accounts (above 500 crore) from banks.
• Its formation was announced in the Union Budget for 2021-22, is intended to resolve stressed loans amounting to about 2 lakh crore, of which fully provisioned assets of about 90,000 crore are expected to be transferred to it from lenders in the first phase.
• NARCL has shareholding from 15 Indian lenders and Canara Bank is the sponsor of this Asset Reconstruction Company (ARC).
• While public sector banks have taken a majority stake in NARCL, India Debt Resolution Company Ltd (IDRCL) will be majorly owned by private sector banks.
• Approvals granted: The NARCL, which will acquire the bad loans from banks, and the India Debt Resolution Company Ltd. which will then manage these assets and seek to enhance their value have secured necessary approvals and permissions.

What is a Bad Bank:

• A bad bank is simply an entity which specialises in handling bad loans or NPAs.
• It is basically an entity which buys the NPAs of commercial banks and tries to recover at least a part of the value of such NPAs.
• Usually, banks discount the book value of NPAs when they are transferred to a bad bank. After that, whatever recovery is possible from the bad loan becomes the earnings of the bad bank.
• Unlike commercial banks, bad banks do not undertake deposits, lending or other usual banking operations.
• Another name for a bad bank is Asset Reconstruction Company (ARC). It is a company which buys the bad loans of banks or any other financial institution, to let them clear their books and resume lending.

What is Swiss challenge auction:

Swiss Challenge method is one of the ways of awarding government contracts to private players. Without an invitation from government, a private player can submit a proposal to government for development of an infrastructure project with exclusive intellectual property rights. Then government has two options with it:

• • Government can buy the intellectual property rights from the original proponent and call for a competitive bidding to award the project.
  • Government allows other players with similar capabilities to submit their proposals. If any proposal is better than the proposal of the original proponent, the original proponent is asked to match with the other proposal. If he fails, then it would be awarded to the best bidder.