NARCL–IDRCL (Bad Bank Framework)

The NARCL–IDRCL framework represents a major institutional reform within India’s banking and financial system, aimed at addressing the persistent problem of stressed assets and non-performing loans. Commonly described as India’s “bad bank” model, this framework seeks to cleanse bank balance sheets, restore credit growth, and reinforce financial stability. Its relevance is particularly significant in the study of banking, finance, and the Indian economy, as it reflects both policy innovation and structural reform in the financial sector.
The concept of a bad bank involves the separation of bad or stressed assets from healthy assets of banks, allowing banks to focus on core lending activities while a specialised institution manages recovery and resolution. In India, this idea materialised through the establishment of two complementary entities—NARCL and IDRCL—working together to resolve legacy stressed assets.

Background and Rationale

The Indian banking system has grappled with high levels of non-performing assets for more than a decade. Following rapid credit expansion during the mid-2000s, several large corporate borrowers defaulted due to economic slowdown, project delays, regulatory hurdles, and governance issues. Sectors such as infrastructure, steel, power, and construction were particularly affected, leading to a sharp rise in NPAs, especially in public sector banks.
Although several measures were introduced to tackle this issue—including asset quality reviews, recapitalisation of banks, and the Insolvency and Bankruptcy Code—the resolution of large, complex stressed assets remained slow and fragmented. Multiple lenders, legal delays, and limited recovery values constrained effective resolution. Against this backdrop, the Government of India announced the bad bank framework in the Union Budget 2021–22 to provide a centralised and coordinated mechanism for stressed asset resolution.

Institutional Structure

The bad bank framework in India follows a dual-entity structure designed to separate asset ownership from asset management.

• National Asset Reconstruction Company Limited (NARCL) is responsible for acquiring stressed assets from banks. It functions as an asset reconstruction company, purchasing non-performing loans from banks at an agreed value.
• India Debt Resolution Company Limited (IDRCL) acts as the resolution and management arm. It is tasked with managing, restructuring, and resolving the stressed assets acquired by NARCL.

This separation aims to ensure professional management, operational efficiency, and transparency in the resolution process, while also reducing conflicts of interest.

Ownership and Regulatory Framework

NARCL is majority-owned by public sector banks, reflecting their large exposure to stressed assets. IDRCL, on the other hand, has a more diversified ownership structure with participation from private sector entities, bringing in specialised expertise in distressed asset management.
Both entities operate under the regulatory oversight of the Reserve Bank of India, which regulates asset reconstruction companies under existing banking laws. A distinctive feature of the framework is the sovereign guarantee provided by the Government of India on a portion of the security receipts issued by NARCL. This guarantee enhances confidence among banks and mitigates the immediate financial impact of transferring stressed assets.

Operational Mechanism

The operational process of the NARCL–IDRCL framework involves multiple stages. Banks identify large stressed assets, usually involving consortium or multiple-lender exposures, that are suitable for transfer. These assets are then acquired by NARCL based on valuations conducted by independent experts.
Payment to banks is made partly in cash and partly through security receipts. The cash component provides immediate liquidity to banks, while the security receipts represent future recovery potential and are backed partially by a government guarantee. IDRCL subsequently undertakes the task of resolving these assets through restructuring, sale to investors, or liquidation, depending on commercial viability.
By aggregating stressed assets from multiple banks, the framework enables coordinated decision-making and avoids delays caused by divergent lender interests.

Role in Banking Sector Reforms

The NARCL–IDRCL framework complements existing banking reforms rather than replacing them. While mechanisms such as the Insolvency and Bankruptcy Code provide a legal framework for time-bound resolution through tribunals, the bad bank offers a market-driven, out-of-court solution for complex stressed assets.
It is particularly useful for large-value accounts where resolution requires specialised expertise, long-term restructuring, or strategic asset sales. By transferring these assets to a dedicated institution, banks can reduce managerial distraction and focus on credit appraisal, risk management, and new lending.

Implications for Financial Stability

From the perspective of financial stability, the bad bank framework addresses systemic risks arising from prolonged asset quality stress. Lower NPAs improve key banking indicators such as capital adequacy ratios, profitability, and return on assets. Healthier banks are better equipped to absorb shocks and support economic activity.
Additionally, improved balance sheet strength enhances the effectiveness of monetary policy transmission. When banks are less burdened by stressed assets, changes in policy interest rates are more efficiently passed on to borrowers, supporting macroeconomic management.

Impact on the Indian Economy

The broader economic impact of the NARCL–IDRCL framework lies in its potential to revive credit growth. By freeing up capital locked in unproductive assets, banks can increase lending to productive sectors of the economy. This is particularly important for infrastructure projects, manufacturing, and micro, small, and medium enterprises, which rely heavily on bank finance.
A more efficient stressed asset resolution mechanism also improves investor confidence, both domestic and foreign, by signalling commitment to financial sector reforms. In the long run, this contributes to sustainable economic growth and financial deepening in the Indian economy.

Advantages of the Framework

The key advantages of the NARCL–IDRCL model include faster resolution of legacy stressed assets, professional management of distressed loans, and reduced burden on individual banks. Centralised resolution improves bargaining power with borrowers and investors, potentially leading to higher recovery values.
The framework also introduces greater transparency and accountability in the handling of NPAs, while the government guarantee provides temporary risk mitigation during the transition phase.