Evaluate the performance of the National Asset Reconstruction Company Limited in cleaning up legacy bad loans. What are the major impediments to its effective functioning?

The Government sponsored National Asset Reconstruction Company Limited (NARCL) was formed in 2021 to fast pace the resolution of bad loans in the banking industry. The motive was to acquire all the bad loans from PSU banks and help them to go ahead for a new lending cycle.

Performance of NARCL:

• NARCL has largely remained a nonstarter in the past one year.
• Banks have not shown interest in transferring their bad loans because of lesser valuation.

Impediments in effective functioning:

• Lack of incentive for banks to transfer their bad loans to NARCL.
• NARCL, being a public entity, is subjected to scrutiny by vigilance departments and ED, hence it cannot inflate the valuation.
• Similarly, the PSU banks are also facing the same issue. Being a public entity, they will come under scrutiny if they prefer NARCL over other ARCs even after lower valuation.
• The Insolvency and Bankruptcy Code (IBC) offers a better resolution for banks.

Way forward:

The NARCL needs to work on project viability and dive deeper into the root cause of the loans going bad.