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The government has approved providing Rs 30,600 crore as state guarantee for the security receipts issued by the bad bank, National Asset Reconstruction Company Ltd (NARCL).

The government guarantee mechanism was approved by the Union cabinet on Wednesday, paving the way to operationalise the country's first bad bank in which majority 51 per cent stake is held by public sector banks.

The government guarantee will allow banks to transfer their non-performing assets (NPAs) to NARCL, which will buy the stressed assets on payment of 15 per cent of the amount in cash and the balance 85 per cent in security receipts.

The government guarantee will be available on the gap between the face value and actual realised value of the assets to ensure that banks do not lose out on stressed asset sale while also helping to clean up their balance sheet.

The guarantee on SRs will be available for a period of five years to ensure that resolution of bad assets happen in a time-bound manner without any delay. The incentive of government guarantee would cease if asset resolution takes more than five years.

The government has identified Rs 2 lakh crore of stressed assets in the banking sector to be transferred to the NARCL. However, in the first phase, it would take up fully-provided bad assets worth Rs 90,000 crore.

Giving details of the latest reform initiative taken by the government to clean up the banking sector, Finance Minister Nirmala Sitharaman said that in the last six financial years, banks have already recovered Rs 5,01,479 crore. Of this, Rs 3.1 lakh crore has been recovered since March 2018.

Sitharaman added that the government guarantee will give more confidence to the lenders to sell their assets to NARCL.

Addressing a press conference on Thursday, the Finance Minister also said that apart from NARCL, the government is also setting up an India Debt Resolution Company Ltd to manage NPAs. In this company, PSBs and state-owned financial institutions will own 49 per cent stake.

She added that private sector banks will also hold stake in it.

The Finance Minister in her 2021-22 Union Budget speech had announced the setting up of a 'bad bank', including an asset reconstruction company and asset management company to take over the existing stressed debt of banks.

A bad bank is a bank set up to buy the bad loans and other illiquid holdings of another financial institution.