Can India’s Bad Bank Succeed Where Lenders Failed?

After years of debate, India’s bad bank is on the way to being set up.

The structure for the National Asset Reconstruction Company Ltd. is still in the works, the entity is yet to be registered and an ARC license is pending. But lenders have started identifying accounts they intend to sell to this entity to reduce their own burden of resolution.

The government will provide a guarantee of Rs 31,000 crore for a period of five years, Bloomberg reported on Tuesday. An estimated Rs 2 lakh crore in assets are likely to be transferred to the NARC over time.

The accounts identified in the first list include chronic cases of stressed debt, leaving open the question—will the bad bank be simply used to park impaired assets or will it help make the resolution and recovery process more efficient? Bankers say while some of the accounts being transferred could still be salvaged and dues recovered, many others are unlikely to see investor interest.

Accounts across 22 stressed companies, amounting to over Rs 82,000 crore, have been identified for sale to the NARC, according to a list accessed by BloombergQuint. Ten of these alone account for more than Rs 71,000 crore in bad loans.

The first tranche of assets includes Videocon Oil Ventures Ltd., Amtek Auto Ltd., Castex Technologies Ltd., Jaypee Infratech Ltd. and Reliance Naval & Engineering Ltd., according to three people aware of the matter, who spoke on conditions of anonymity.

These are all accounts which have been non-performing for over four years, where banks have made 100% provisions against the bad debt. Most of them have also been through multiple rounds of resolution, which have either failed or implementation of a resolution plan is pending.

An email sent to Sunil Mehta, chief executive, Indian Banks’ Association, which is leading talks on the bad bank initiative, on Monday, remained unanswered.

Top Accounts

Videocon Oil Ventures

Videocon Oil Ventures, which has been classified as NPA since 2017, is the largest account up for transfer. It’s the offshore oil asset of Videocon Industries Ltd.

SBI Capital Markets, the investment banking arm of India's largest lender, has been trying to find new buyers for the account since 2018. The plan has been to monetise the upstream oil and gas assets in Brazil and Indonesia, however, a buyer is yet to be found. According to two of the three people quoted above, the oil and gas assets do have , which can be properly extracted through a debt aggregation process.

If one of the issues holding up a sale was that potential buyers preferred to deal with one entity instead of a consortium of bankers, the sale process could move fast, ensuring better recovery, the two people said.

Jaypee Infratech

Jaypee Infratech, which has been under bankruptcy since 2017 is another account where aggregation can help. Currently, the financial creditors of the construction firm are voting on plans submitted by NBCC Ltd and Suraksha Asset Reconstruction Co., which is expected to conclude on June 23.

Both bidders have proposed to pay banks by giving them land parcels in Uttar Pradesh, instead of upfront cash. As monetising these land parcels is a time consuming exercise, aggregation under the NARC could ensure a more efficient recovery process, the first two people quoted above said.

Amtek Auto

Amtek Auto, which has been under the Insolvency & Bankruptcy Code since 2017, has seen multiple ups and downs. After Liberty House U.K. bid for the company and then withdrew its plans in 2019, U.S. based Deccan Value Investors offered to buy the company.

The plan involved paying Rs 500 crore upfront to the creditors and another Rs 2,000 crore to be paid over the next few years. The company’s outstanding loans stand at over Rs 12,500 crore. While the NCLT approved Deccan Value’s resolution proposal in July last year, the bidder has sought to withdraw from the process, citing concerns about certain financial aspects of Amtek Auto. The appellate tribunal in April set aside the bidder’s concerns and asked it to implement its plans. Currently, an Implementation & Monitoring Committee is overseeing the implementation process.

If the resolution process fails again, the NARC could consider appointing interim management and run Amtek Auto as a going concern, to reinstate normal operations, the first person cited earlier said. This could help improve operations, which may attract a higher recovery through a new buyer.

Reliance Naval & Engineering

The situation in Reliance Naval & Engineering is different. The company, which was previously known as Pipavav Defence and Offshore Engineering, has been under stress since 2013. After a recast under the corporate debt restructuring scheme in 2015, the warship maker was sold to Anil Ambani’s Reliance Group. It currently owes nearly Rs 9,000 crore in bank loans.

While the expectation was that the sale would resolve the stress in the company, it continued to face losses, making repayments difficult. Eventually in 2018, IDBI Bank Ltd. filed an insolvency petition against the company. Here too, the resolution process has seen multiple rounds of bidding, with lenders being unable to find a strong buyer.

Some of the other chronic accounts in the list include Wind World India, Visa Steel Ltd, GTL Ltd., where stress has persisted for over five years and resolution proceedings have not yielded any results, the people cited earlier said.

The third person cited earlier, a senior public sector banker closely involved with the development of the NARC, said a majority of the companies on the list have valuable fixed assets, which may have lost over the years. However, with concerted turnaround efforts, resolution in these accounts can be achieved and can be extracted.

According to the first the of the three people cited earlier, the NARC is being set up only as an aggregation entity, which will buy the stressed assets. It will then hire another agency, currently called the Debt Management Company, which will be responsible for interim management, turnaround and finding new buyers for the underlying assets. While the NARC is being led by public sector institutions, the DMC is expected to be a fully private-owned company.

Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services, said extraction by the NARC can only be achieved if it invests toward finding the right talent pool.

“We need strong managers who take decisive calls. Aggregation is good, but you need to also focus on the resolution part of the process,” Parekh said. “A good manager will ensure that the companies get what they need to be productive again.”