RBI rethink on 'dual structure' may delay launch of bad bank

The bad bank - a key initiative announced in the last budget - could get delayed after the Reserve Bank of India informed lenders last fortnight that it is not inclined to permit a dual structure in which one entity acquires non-performing loans and another reaches a resolution. This is because there is no such legal provision under which the central bank can give its blessings to such an arrangement, said people aware of the matter.

As per the proposal submitted to the Reserve Bank of India, the National Asset Reconstruction Company (NARCL) would have acquiring non-performing loans from banks while India Debt Resolution Company (IDRCL) would provide resolution of these assets.

The RBI has conveyed, said the people cited, that under the Securitisation and Resolution of Financial Assets and Enforcement of Securities Act (Sarfaesi), acquisition and resolution has to be housed under the same structure. The RBI draws its power to regulate and issue ARCs licences from the Sarfaesi Act.

After RBI expressed its reservations, sponsors of NARCL- the state-owned banks- have now proposed a structure where there is a principal-agent relation between NARCL and IDRCL, the people said. As per the new arrangement, NARCL will enter into a contract with IDRCL to outsource resolutions of NPA. However, the resolutions offered by IDRCL will not be binding on NARCL.

"Commercial banks wanted the RBI to regulate the dual structure but under the given circumstance they are working on the principal-agent relationship so that RBI will have indirect control over IDRCL," said a lender. RBI did not respond to ET's query.

Lenders are in a hurry to sort out the issue soon since the government wants them to announce at least a token transaction before the union budget is presented on 1 February, said the people cited. The announcement on the formation of a bad bank was made in the last budget.