Bad Loans, New Bank: Assessing The Progress Of The National Asset Reconstruction Company Limited (NARCL) In India (2025) 

Policy Update
Sruti Halder

Background

The National Asset Reconstruction Company Limited (NARCL) was conceived in the Union Budget 2021-22 as India’s government-backed “bad bank,” designed to aggregate and resolve large legacy non-performing assets (NPAs) sitting on the books of public sector banks (PSBs). The rationale traced back to the 2015 Asset Quality Review, which exposed a high incidence of NPAs in Indian banks, prompting the government’s four-pronged strategy of Recognition, Resolution, Recapitalisation, and Reforms. NARCL was the institutional response to the residual problem of large, complex, consortium-held bad loans that traditional recovery channels the SARFAESI Act, DRTs, and existing private Asset Reconstruction Companies (ARCs) had struggled to resolve efficiently.

NARCL’s objective was to consolidate stressed loans above ₹500 crore under one roof for coordinated, market-based resolution, thereby freeing bank capital for fresh lending. NARCL was incorporated under the Companies Act and applied to the Reserve Bank of India for a licence as an Asset Reconstruction Company, having been set up by banks to aggregate and consolidate stressed assets for subsequent resolution.

The Union Cabinet formally approved the funding architecture on 15 September 2021, when it approved a Central Government guarantee of ₹30,600 crore to back Security Receipts (SRs) issued by NARCL for acquiring stressed loan assets, in line with the Budget 2021-22 announcement. Target beneficiaries are primarily PSBs, whose balance sheets stood to be cleaned up, and by extension the wider credit ecosystem. PSBs hold 51 per cent ownership in NARCL, while PSBs and public financial institutions together hold a maximum 49 per cent stake in IDRCL, the balance being held by private lenders.

The key provision governing acquisitions is a 15:85 structure: around 15 per cent cash payment is made to banks based on valuation, while the remaining 85 per cent is paid as government-guaranteed security receipts. The guarantee, valid for five years, can be invoked by NARCL to meet the shortfall between the face value of the SR and the actual realisation upon resolution or liquidation, with NARCL liable to pay an annual guarantee fee. No major legislative amendment has since been made, though the acquisition pipeline continues to be expanded through fresh identification exercises, including an SBI-led committee identifying 18 new stressed accounts for potential acquisition.

Functioning

NARCL operates through a twin-institution model. NARCL itself acquires and holds stressed loans, while its exclusive resolution partner, India Debt Resolution Company Limited (IDRCL), manages and disposes of these assets by engaging turnaround professionals. NARCL’s acquisition processes are administered by its Financial Asset Acquisition Policy, framed under the extant guidelines for asset reconstruction companies, and it maintains an exclusive arrangement with IDRCL for end-to-end resolution assistance.

In practice, a lead bank in a lending consortium negotiates and executes an assignment agreement transferring the loan to NARCL. For instance, an Assignment Agreement executed in March 2025 saw ICICI Bank as lead bank, along with seven other banks, assign loan accounts to NARCL, making it the lender and secured creditor with full associated rights and securities. Price discovery for onward resolution typically occurs through a Swiss Challenge mechanism, where competing ARCs may better an initial offer. Where insolvency proceedings are already underway, NARCL participates as a financial creditor within IBC/NCLT processes.

The funding structure of 15 per cent cash and 85 per cent sovereign-guaranteed SRs was intended to protect banks’ balance sheets while deferring the fiscal cost of recovery shortfalls. Implementation, however, was slower than envisaged. Initial delays occurred because the RBI was dissatisfied with the originally proposed structure, forcing a revised plan. Momentum has since improved considerably, but institutional friction including disputes over legal liability for fraudulent accounts between NARCL and selling banks, and a pronounced turnover in NARCL’s leadership, has periodically slowed functioning.

Performance

Source: Ministry of Finance/PIB press release, “NARCL Strengthens India’s Stressed Asset Resolution Framework,” 30 April–1 May 2026.

Source: Business Standard (compiled from government sources) and PIB. Minor variance between the Business Standard and PIB figures reflects differing reporting dates.

The trajectory shows a slow first two years followed by sharp acceleration: acquisitions roughly tripled between the FY24 mark and March 2026, while recovery realisation jumped sharply in FY 2025-26, when ₹4,364 crore was realised, accounting for approximately 70% of cumulative recoveries. The three fully resolved accounts recovering between 115 and 183 per cent of acquisition cost suggest that, once resolutions mature, value realisation can exceed the discounted acquisition price, partly validating the model’s design logic.

Two years after inception, NARCL had acquired only ₹21,350 crore of outstanding debt against a self-imposed ₹50,000 crore target, of which just ₹4,215 crore was paid with a discount of 82 per cent to nominal value, with only 2.58 per cent paid in cash. 

Impact

NARCL has meaningfully contributed to balance-sheet clean-up, and its presence appears to have improved market dynamics more broadly. A notable side-effect has been that NARCL’s activity in the NPA market has increased the competitiveness of pricing offered by other private asset reconstruction companies. Independent academic assessment is cautiously positive: a 2026 study concludes that while traditional recovery mechanisms showed limited effectiveness, NARCL offers structural advantages in balance-sheet clean-up and coordinated resolution of complex NPAs, though recovery outcomes are still evolving.

However, the pace of acquisition against the original ₹2 lakh crore target and five-year guarantee window has fallen short of initial ambition, and critical scholarship flags deeper design risks. An Emerald-published critique argues, using an economic model of ARC gains-to-trade, that the rules of NARCL’s design create an uneven playing field likely to cause systematic overpricing of non-performing loans, raising government liability under the sovereign guarantee and potentially turning NARCL into a warehouse for bad loans rather than a vehicle for genuine reconstruction. This tension between accelerating headline acquisition numbers and ensuring genuine value-accretive resolution is central to any honest assessment of NARCL’s impact five years on.

Emerging Issues

Several structural concerns persist. Asset valuation remains contentious, since banks typically expect higher values while buyers demand lower prices, creating a persistent negotiation gap, and legal processes tied to NCLT and DRT backlogs continue to delay resolution timelines. 

Governance stability is a recurring worry given leadership turnover and unresolved questions over liability allocation for accounts later found to involve fraud. The five-year sovereign guarantee window approved in September 2021 is now approaching its horizon, raising questions about renewal, the crystallisation of contingent fiscal liability, and whether time pressure could push NARCL toward hastier, less value-optimal resolutions. 

There is also a competitive-dynamics concern: as NARCL scales up, smaller private ARCs may struggle to compete for large accounts, raising questions of market concentration and a level playing field within the ARC sector that the RBI, as regulator, will need to monitor.

Way Forward

Going forward, policymakers should consider a transparent, time-bound decision on extending or restructuring the sovereign guarantee, ideally linked to performance benchmarks rather than a blanket renewal. Streamlining due diligence and the Swiss Challenge process would reduce the acquisition lag that characterised NARCL’s early years, while standardised contractual clauses on fraud-account liability would reduce disputes between NARCL and selling banks. Some market commentators have suggested a closer integration of NARCL and IDRCL’s mandates so that resolution strategy is embedded from the point of acquisition itself, which could shorten resolution cycles.

Strengthening public disclosure through a regularly updated MIS dashboard and periodic Parliamentary Standing Committee or CAG scrutiny — would improve accountability and allow independent verification of recovery claims. Finally, deepening the secondary market for security receipts, and ensuring NARCL’s acquisition pricing does not crowd out or systematically outbid private ARCs, would help the broader stressed-asset ecosystem mature in a way that serves both fiscal prudence and the government’s financial-stability objectives.

References 

Ministry of Finance. (2026). NARCL strengthens India’s stressed asset resolution framework, accelerates recoveries in FY 2025–26 [Press release]. Press Information Bureau. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2256984

Press Information Bureau. (2021). Cabinet approves Central Government guarantee to back Security Receipts issued by National Asset Reconstruction Company Limited. Government of India. https://www.pib.gov.in/PressReleaseIframePage.aspx?PRID=1755512

National Asset Reconstruction Company Limited. (2025). About NARCL. https://www.narcl.co.in/en/ (narcl.co.in)

Kumar, H. (2026, January 8). NARCL’s stressed asset acquisitions set to cross ₹1.68 trillion. Business Standard. https://www.business-standard.com/industry/news/narcl-s-stressed-asset-acquisitions-set-to-cross-1-68-trillion-125070101418_1.html

ReedSmith. (2024, March 27). India’s bad bank, two years on… https://www.reedsmith.com/our-insights/blogs/structured-finance-in-brief/102k6ls/indias-bad-bank-two-years-on/

Yadav, J., & Yadav, P. (2026). How effective are bad bank resolutions? New evidence from India (NARCL). International Journal of Management and Organizational Research, 5(1), 48–54. https://www.researchgate.net/publication/408407077

A critique of the national asset reconstruction company, India’s bad bank. (2023). Indian Growth and Development Review, 16(3), 217–229. Emerald Publishing. https://ideas.repec.org/a/eme/igdrpp/igdr-03-2023-0028.html

Business Standard. (2023, December 12). Govt says 10 PSBs transferred NPAs of over Rs 11k cr to NARCL from Jan-Nov. https://www.business-standard.com/amp/economy/news/govt-says-10-psbs-transferred-npas-of-over-rs-11k-cr-to-narcl-from-jan-nov-123121200610_1.html

Testbook. (2025). National Asset Reconstruction Company Limited (NARCL). https://testbook.com/ias-preparation/national-asset-reconstruction-company-narcl

About the Contributor

Sruti Halder is pursuing an MSc in Economics at the Gokhale Institute of Politics and Economics. She is committed to leveraging data-driven research and evidence-based policymaking to promote inclusive and sustainable socio-economic development. 

Acknowledgment

The author expresses sincere gratitude to IMPRI (Impact and Policy Research Institute) for providing the opportunity to prepare this policy update article and for fostering a rigorous learning environment that connects research with public policy practice.

Reviewers: Simona Hughes, Asmatwali

Publisher: Pallavi Lad

Disclaimer: All views expressed in the article belong solely to the author and do not necessarily represent the views or policies of the organisation.

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