As Bad Bank Takes Shape, Government Seen Playing Only A Small Role
People walk past North Block of the Central Secretariat building, which houses the Ministries of Finance and Home Affairs, stands in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)  

As Bad Bank Takes Shape, Government Seen Playing Only A Small Role

The National Asset Reconstruction Company Ltd, contours of which are still being discussed, is likely to see limited support from the government. The bad bank-like structure was announced in the Union Budget, with the government saying that it would provide a “guarantee” to the entity.

Details of the proposal are only now being fleshed out.

According to three people in the know, the central government is likely to provide only a 20% credit loss guarantee for loans sold to the NARCL. For the government, the lower guarantee cover will mean that any budget allocations needed towards the NARCL would be limited.

While discussions have taken place, the government is yet to affirm its commitment towards a 20% credit loss guarantee on paper, the bankers cited earlier said.

The limited guarantee cover being offered by the government would mean that banks would have to make 80% provisions against outstanding dues of a stressed account before they are able to sell the loan to the NARCL. The high provisioning requirement could lead to fewer loans being sold.

The IBA has asked banks to collate a list of accounts that could be transferred to the NARCL for resolution and recovery. According to the three bankers quoted above, the first lot of assets to be transferred to the NARCL could be ready before June 30. Fifty loans worth Rs 1 lakh crore could be included in this list, the bankers said.

Queries mailed to the Finance Ministry on May 4 and the IBA on May 5 weren’t answered.

Also read: Bad Bank: Government Guarantee A Bonus, Not An Imperative, Say Bankers

Proposed Structure

The government will have no shareholding or management control in the NARCL. It will be owned largely by public sector lenders, including banks and non-bank lenders.

An independent management will be appointed, which will decide on the loans the NARCL will purchase, the first of the three bankers cited earlier said. The reconstruction company will also own a National Asset Management Company which will take care of interim management and funding for companies whose loans it purchases.

The sale process is likely to work as follows:

  • Banks will shortlist accounts to be sold to the NARCL.
  • In case of consortium arrangements, banks to vote on a proposal to sell the asset.
  • Proposal to be cleared if 75% lenders by value and 60% by number vote in favour.
  • Dissenting creditors will need to abide by a decision passed by majority of the lenders.
  • Once NARCL has reviewed the asset and agreed to make an offer, banks to conduct an auction by the “Swiss challenge” method.
  • Private ARCs can acquire the asset by either offering a price higher than NARCL or the same value in a full cash payment.
  • If no private buyer is found, lenders will sell the asset to NARCL.
  • NARCL to provide 15% of the sale price in cash and 85% in security receipts.
  • Government to guarantee security receipts to the extent that repayment to banks eventually covers up to 20% of the book value of the loan.
  • NARCL will hold the asset for five to 10 years, depending on the nature of the underlying company which took the loan. Infrastructure projects could be held for longer than other assets.
  • NARCL to give management control to NAMC, which will avail interim funding from investors and provide the management team for the underlying asset.

Still Not Done...

While the NARCL has been under discussion since October last year, a number of hurdles still need to be crossed.

For one, the IBA has to seek an ARC license from the Reserve Bank of India. According to the first banker cited earlier, the IBA is yet to submit a proposal to the banking regulator.

Another tricky aspect is the treatment of dissenting creditors in the voting process. The IBA is yet to get all lenders on board to participate in the resolution process through the NARCL structure. Without all lenders agreeing to the sale, the objective of aggregation for resolution would not work, the bankers said. Already, Yes Bank Ltd.’s Managing Director and Chief Executive Officer Prashant Kumar has publicly said the lender may not participate in the sale process and would rather sell its assets to an ARC where the bank has control.

The IBA is also yet to complete the process of appointing staff and management at the NARCL. These people will not only be responsible for determining the assets to be bought from banks, but also manage cash flows of the entity, including settlement of recoveries against security receipts.

According to Aroop Sircar, former chief general manager at State Bank of India, who was directly involved in large restructuring cases, the structure of the NARCL as it looks now could lead to lower interest from bankers.

“The higher provisioning requirement will ensure that only a handful of cases where recoveries by banks are unlikely will be transferred to the structure. It will need to be tweaked further to ensure that it is something which will be useful to banks,” Sircar said. Even if the structure is made immediately operational, it would be some time before it can truly create an impact on the resolution of stressed assets, he said.

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