Category: Banking & Finance

In her Budget speech, Finance Minister Nirmala Sitharaman referred to stressed asset resolution by setting up a new structure. She proposed that an Asset Reconstruction Company (ARC) and Asset Management Company (AMC) would be set up to consolidate and take over the existing stressed debt, and then manage and dispose of the assets to Alternate Investment Funds (AIF) and other potential investors for eventual value realisation.

NPA management has assumed urgency after the Reserve Bank of India, in its Financial Stability Report2021, estimated that Gross NPA (GNPA) of all Scheduled Commercial Banks (SCBs) may increase from 7.5 per cent as on September 2020 to 14.8 per cent in September 2021 under a severe stress scenario, that is nearly double of the existing NPA percentage. The current announcement for creation of a mega ARC/AMC structure appears to be triggered on account of the perceived elevated risks in probable spike of bad loans in the system.

However, so far, the details of the proposed set up have not been officially spelt out. The sooner the ‘design’ and ‘structure’ of the proposed ARC/AMC are articulated and deliberated, the better it is to end speculation around it.

Who will parent and fund the ARC? It is believed that banks themselves may have to contribute to the equity and funding. But take a look back. The experiment of a bank-led ARC structure is not new. Almost two decades back, top three lenders joined together and started the first ARC in India. Many of the present ARCs, too, have banks as their sponsors/equity contributors. After few years of its operations, concerns were voiced on the ARC(s) being used as warehouse of NPAs by the promoting banks.

Fear of accountability

What will be the criteria for identification of assets to be sold? It is learnt that the Indian Banks Association (IBA) has called for data in respect of consortium lending above ₹500 crore with some riders, such as exclusion of liquidation cases, fraud cases and cases under resolution in IBC where resolution is in sight, from all banks.

So, let us assume this is the target NPAs to be acquired. The next logical question is about the purchase consideration. Valuation is one of the major constraints in transfer of loan accounts to ARCs. How to bridge price expectation mismatch? The ARC can resolve only when it acquires at a value thatattracts investors and buyers. And more often than not, a bank’s valuation expectations are much higher and for any sale below this price, there is a fear of accountability.

And what about treatment of lenders with different charges – first charge, second charge, parri passu charge with different categories of security such as land and building, plant and machinery and current assets. Will there be a structured forum to deal with inter-creditor issues around priority of charges, waterfall mechanism and distribution of proceeds?

There have been some talks that the Security Receipts (SRs) issued by the proposed ARC will be guaranteed by the government. And going by the basic characteristics of SRs, government guaranteeing SRs indirectly means it will pay to the bank for recovery shortfall from defaulting borrower which has moral hazard issues.

While single point debt aggregation is a huge plus for the mega ARC, what’s next? Who will decide the resolution? As per current fair practice code for ARCs, there has to be a consultative process with seller bank holding SRs. What will be the treatment of dissenting creditors/ SR holders and mechanism to break stalemate, if any, while pursuing resolution/ finalising the terms and conditions of sale.

Issues around funding

The next issue is around interim finance and funding working capital to ensure that the unit is running. Who will take care of banking needs, including non-fund facilities? In the absence of clarity on this, the units transferred to ARCs will most likely head for asset sale only, with attendant value destruction.

For a successful turnaround, many policy support measures may be required, particularly in respect of stressed assets in highly regulated sectors such as power, telecom, infrastructure etc. How to build up forward linkage structurally with these sector regulators will be a key challenge that need to be addressed. In India, we already have 28 ARCs existing at present. However, due to paucity of capital, they have not been able to scale up the performance. In the preceding three financial years, the sale of NPAs to ARCs have been 6 per cent of outstanding NPAs of the banking system. With a possible spike in NPAs, there is a need for more ARCs.

The best possible design

However, the mega ARC/ AMC or any other structure is no magic wand. All stakeholders need to brainstorm the best possible design and structure for optimal results in a time bound manner. The factors that have constrained the effective functioning of the existing ARCs need to be critically evaluated and lessons from history learnt to avoid pitfall in design and structure of the proposed mega ARC.

From international experience, the success of an ARC depends on its ability to attract ‘new money’ from investors with risk capital and having risk appetite to invest in distressed debt. With focussed approach by the government and banks, book building for the new ARC may be easy. But its success will depend on its ability to develop an ecosystem and a vibrant distressed debt market. New money can only give real exit to banks. Else, the proposed ARC will remain like a NPA Corporation that acquires NPAs from promoter lenders by giving minimum support price for the assets, as decided by the same lenders followed by a value erosion in warehoused NPAs.

Hari Hara Mishra is an ex-banker and has been associated with various ARC initiatives, including the drafting of a Key Advisory Group on ARC sector reforms. Views expressed in the column are personal and do not represent any organisation or association he belongs to

KR Srivats

It’s almost a month since the Budget was announced. If there is one proposal in the Budget that could truly have a transformative effect on the Indian banking sector, it is the one on the setting up of an Asset Reconstruction Company (ARC) along with an Asset Management Company (AMC) to take over the stressed debt of banks.

No clarity yet

Even though there is no clarity on the final design of this proposal (loosely called bad bank by hacks and certain banking industry observers), one thing is for sure – the sooner the government goes about finalising the structure, the better it will be for the economy.

Yes, you got it right. There is nothing wicked about a bad bank. It is basically an entity that houses the bad loans (non-performing assets) of a bank. This bad bank will goabout resolving or liquidating bad debt (stressed debt) to recover as much money as it can. The bad bank model was first proposed in the 1980s in the US (Mellon Bank).

Going by the thinking in Department of Financial Services (DFS), one may have to gear up for a ‘Made in India’ model of bad bank that will have to function in an ecosystem where there is no deep debt market to write home about.

Typically, a Bad Bank structure works efficiently when there is a deep debt market, and the number of market participants are wide enough to allow sufficient price discovery and market making.

Structure of bad bank

If one were to infer from the sketchy details available in the public about the proposed structure, one may end up with a solution that may be ill suited from a market economy standpoint, a status that India has been striving to achieve in the recent decades.

So, what is being envisaged is an ARC (let’s call it a proposed national ARC), where the bad debt of banks (public sector banks) will be transferred (not sold at market price) to it at net book value (value of exposure minus the provisions made for such accounts).

So, this will be a bilateral transfer (no auction of NPAs) from banks to the national ARC. What is disappointing is that there will be no real price discovery as the other 28 existing ARCs in the market will not get an opportunity to bid for such bad debts (assets) at the time of transfer. Now, it is another story how the national ARC will handle the assets it has got at net book value.

The question remains as to what will happen when the net book value of an existing debt in the books of a bank is already ‘nil’, and the answer to this is anybody’s guess. Will the ARC be ready to take it at ‘nil’ value and then look to turn it around or realise a higher value? Hopefully, all those private players running billion-dollar-plus stressed assets fund will get a chance to bid for such assets.

But given India’s continental size and huge stress in the banking system (estimated at ₹8-lakh crore), there will be enough and more for all ARC players if the government and the RBI iron out some rigidities in the system, say some ARC representatives.

RBI chief saves the day

For the several existing ARCs (there are 28 already in Indian market), Reserve Bank of India (RBI) Governor Shaktikanta Das’s comments came asmusic to their ears. Das said that the new ARC will not jeopardise the activities of existing players in the space. At an event organised by the Bombay Chamber of Commerce, he noted that there is scope to have one more “strong ARC”. One of the issues that merit attention is the guarantee that the government has started talking about. There is no mention in Finance Minister Nirmala Sitharaman’s Budget speech about the government looking to give guarantees for this ARC-AMC structure to take off. Clarity is needed on what are the guarantees going to be for – will the government guarantee the security receipts that will be issued or the ARC getting at least the value at which the debt was transferred.

One may also wonder why the government should guarantee a transaction that should essentially be a market-determined play? The second issue is that of the capital of the proposed ARC. The most important decision is that the government will not put even a single rupee of equity capital in the proposed ARC. The only question now remains is whether the new ARC will be PSB-controlled or will the private sector be asked to float the ARC (this is unlikely).

So, if PSBs float and infuse capital in the ARC, critics are going to scoff at the move – they would argue that government may as well infuse capital that would be put in a bad bank directly into public sector banks as capital infusion. Now, alternatively, if the bad bank were to be controlled by the private sector, the reluctance of public sector banks to sell loans to a bad bank at a significant hair cut will still prevail.

The fearof 3Cs

Now, Indian policy makers have seemingly found a way to go about this – make public sector banks transfer the bad loans at Net Book Value and shift the responsibility of recovery to the new ARC (capital funded by public sector banks again out of taxpayers money). By this, bankers’ reluctance to part with assets to ARC will not be there as there is no haircut, and also the much-dreaded fear of 3Cs – CVC, CBI and CAG – will not be there when there are no haircuts to face. It’s another thing that the new ARC will have to use the existing regulatory framework of IBC, SARFAESI to make resolutions work or realise recoveries.

Now, with Prime Minister Narendra Modi comforting bankers that his government will stand by their business decisions taken with the right intent, bankers feel that time may be ripe for the Cabinet (fourth C) to back this up with some form of legislative kavach (protection) for their decisions on handling stressed debt through the new ARC.

The bottomline is that the new ARC is a laudable effort to clear the Indian NPA mess (which may get accentuated once the SC gives its final ruling on asset classification standstill). The new ARC may take wings for the country’s benefit once design issues are sorted out and all aspects around its execution are covered.

Our Bureau

The Finance Ministry, on Sunday, further extended the due date for filing annual GST returns for FY20 to March 31.

“In view of the difficulties expressed by the taxpayers in meeting this time limit, the government has decided to further extend the due date for furnishing of GSTR-9 and GSTR-9C for financial year 2019-20 to 31.03.2021 with the approval of Election Commission of India,” the Finance Ministry said in a statement.

February 28 was the extended due date for filing annual returns, while the original due date was December 31, 2020.

GST assesses have to file monthly/quarterly and annual returns. Annual returns have two forms – GSTR 9 and GSTR 9C. While GSTT 9 is for all assesses, GSTR 9C is the reconciliation statement to be submitted by those GST-registered taxpayers to whom GST audit applies. GST Audit applies to those taxpayers whose turnover exceeds ₹2 crore. Section 44 of CGST Act prescribes annual returns to be filed.

The six debt schemes of Franklin Templeton India received ₹475 crore from maturities, coupons and prepayments in the fortnight ended February 26.

The total inflow into these schemes stands at ₹15,048 crore since April 23, when the debt funds were suspended abruptly for investment and redemption.

As per the Supreme Court direction, SBI Funds Management has distributed ₹9,122 crore available in the five of the six cash-positive schemes. The remaining ₹1,180 crore will be distributed in tranches without waiting for liquidation of all securities in the portfolio, said the fund house.

Franklin Templeton had raised debt to meet the initial redemption pressure in these schemes early last year and repaid them before distributing the surplus to investors.

The debt level in the Income Opportunity Fund has reduced from ₹79 crore as it received ₹44 crore in the fortnight under review.

The Ultra Short Bond Fund has the highest surplus cash of ₹789 crore, while the Short Term Income Plan and Low Duration Fund have ₹246 crore and ₹66 crore. The Credit Risk and Dynamic Accrual funds have ₹60 crore and ₹19 crore surplus cash.

The NAVs of all the six schemes are higher than the date on which the winding-up decision was taken, it said.

The Supreme Court, in its February 12 order, appointed SBI Funds Management as the authorised person under Regulation 41 to take the next steps on monetisation of asset held by the schemes.

As the Indian insurance industry is in the midst of a transformation with changing customer preferences and growing digital adoption, it’s imperative now for all key stakeholders — insurers, Insurtechs and regulators — to work together to ensure the best experience for the end customers and thereby ensure success for the industry, says a report of Boston Consulting Group and India Insurtech Association.

The Indian Insurance industry has seen significant progress with life and non-life insurance growing at 17 per cent and 14 per cent CAGR respectively, in the past five years. The total number of lives covered almost doubled from 12 crore to 23 crore during this period and the non-life segment saw six new entrants, taking the total number of players to 34.

However, there is still scope for growth. The insurance market in India remains under-penetrated compared to global leaders. In the US, more than 90 per cent of lives are covered by life and health insurance, while in India the corresponding figures are only 28 per cent and 34 per cent, respectively. Other segments, including property and crop insurance, also have scope for more penetration.

The rapid adoption of digital in insurance and the changing customer behaviour along with the influx of new technologies have led to key shifts in the industry in terms of product innovations, emergence of ecosystems and data, and technology-driven innovations across the value chain.

Insurers have recognised these shifts and have effected rapid interventions to adapt. The companies that have invested in such change are already seeing impact on key metrics like profitability, productivity, NPS and turnaround time.

The fundamental shifts in consumer preferences have also accelerated innovation and the growth of Insurtechs. The Indian Insurtech landscape was dominated by multi-insurance players such as Policybazaar, Coverfox, and Renewbuy during 2014 to 2017. Since 2018, general insurance saw a higher share of funding due to the emergence of strong players like Acko and Digit Insurance. Funding to General Insurance focused Insurtechs has increased from a negligible share in 2014-16 to almost 75 per cent of the overall funding in 2020, it pointed out.

Insurtechs, both globally and in India, are driving innovation in the insurance industry, primarily by ushering new ideas, which the rest of the industry then builds on. A sizeable number of Insurtechs have been accelerating transformation across critical dimensions. In the current transformation phase, it is immaterial to ask, “Is the insurance industry about insurers leveraging technology or about tech companies offering insurance?” The answer should be coming together of insurers, Insurtechs and the regulator for the benefit of end consumers and industry growth.

Insurers on their part could identify right collaborative models and push for customer-centric innovations, while insuretechs could ensure a continuous pipeline of ideas and build scale with a digital-first mindset, leveraging data and analytics in addition to collaboration with insurers.

Regulators could facilitate collaboration between the two, allow insurers to buy some stake in start-ups, streamline product approval process and encourage the use of new data resources, said the report.