New Asset Reconstruction and Asset Management Company

Finance Minister Nirmala Sitharaman in her Budget 2021 speech has proposed to set up an asset reconstruction company and an asset management company (AMC) to deal with non-performing assets (NPA) in the banking sector.

Key Points

• The minister proposed to set up an asset reconstruction company and an asset management company (AMC) to clean up the NPAs of the banks.
• This new proposed entity will help in effectively dealing with the NPAs which is expected to increase once the regulatory forbearance to deal with the impact of COVID-19 is withdrawn.
• An Asset Reconstruction Company Limited and Asset Management Company would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realization.
• Provision Coverage Ratio in most of the banks is above 80% indicating that the lender has made a provision of 80% against NPAs.
• As per RBI’s Financial Stability Report (FSR), the gross NPAs of banks may rise from 7.5% in September 2020 to 13.5% by September 2021.

Non-performing Assets

The Non-Performing Assets are the assets that cease to generate any income for a bank. In simple terms, it is a bank loan default. If a person does not pay a loan or advance for more than 90 days then it becomes a Non-performing asset (NPA).