The Union Cabinet is likely to clear the proposal to set up a bad bank — National Asset Reconstruction Company Limited (NARCL) — with a government guarantee of about Rs 31,000 crore.

Sources said the proposal, announced in the budget, could be taken up at the meeting of the council of ministers this week as the plan is to start work on the formal structures of the bank from next month.

They said the actual transfer of NPAs from the banks to NARCL would take place by the end of this fiscal.

Banks have reviewed 101 non-performing assets (NPAs) in the first phase and now plan to transfer 22 accounts amounting to roughly Rs 89,000 crore to the bad bank.

Punjab National Bank managing director S. S. Mallikarjuna Rao has said the bank has identified stressed assets worth Rs 8,000 crore in its book for transfer to this asset reconstruction company.

The PNB managing director expects the bad bank to be operational from July this year.

“We are expecting everything to be put in place by June 30 and from July 1 onwards things will start functioning. The Indian Banks Association has already indicated this,” Rao added.

Public sector banks together are expected to pick up a 51 per cent stake in the bad bank. Rao said that PNB shareholding will be less than 10 per cent.

The bad bank was initially proposed by the Indian Banks Association, and later endorsed by the government in the budget.

In her budget this year, finance minister Nirmala Sitharaman had said an asset reconstruction company would be set up to consolidate and take over the existing stressed debt of PSU banks that will enable them to clean up their books.

It will then manage and dispose of the assets to alternate investment funds and other potential investors for eventual value realisation, she added.

Security receipts

National Asset Reconstruction Company Ltd (NARCL) will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts. The government guarantee would be invoked if there is loss against the threshold value.