Tag: arc

ICICI Bank ex-executives face EOW Probe, BFSI News, ET BFSI

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The Economic Offences Wing (EOW) of the Mumbai Police has begun a probe into charges of alleged wrongdoing by ICICI Bank officials in a case filed by a hotelier.

The case pertains to a complaint filed by a hotelier in July this year against five former senior bank officials and an asset reconstruction company (ARC) for allegedly duping him of ₹120 crore. The original complaint at the BKC police station in Mumbai has been transferred to the EOW now.

The development comes soon after the recent controversial arrest of former SBI chairman Pratip Chaudhuri – which arose out of a complaint filed by a Jaisalmer-based hotelier over the sale of his hotel to an ARC by SBI in 2014.

One of the bank officials, who is employed by another institution now, was recently summoned by the EOW to provide details of transactions – from the sanction of loans to the sale to an asset reconstruction company after the borrower defaulted on payments.

“The senior executive was called in to explain certain banking procedures pertaining to sanctioning of loans, functioning of the credit committee and the process of roping in an ARC. The said executive joined the probe on Tuesday,” a senior official with the Mumbai police told ET.

While the EOW maintains that the executive isn’t being treated as an accused and was summoned only to explain the banking procedures, the FIR registered by the complainant Vishal Sharma with the BKC police station alleges fraud.

ICICI bank did not respond to ET’s queries.

Sharma, director of Hotel Horizon Pvt Ltd in Mumbai, has alleged that in 2011 the bank sanctioned a ‘senior term loan’ of ₹326 crore and a ‘subordinate term loan’ of ₹25 crore to build a luxury hotel. He claims that even before the agreement was inked or the loan sanctioned, the bank officials recognised in their books to ‘show profit’.

While Sharma made a request of ₹65 crore to be disbursed as the first instalment, the bankers who were part of the management committee submitted what the FIR filed by him describes as a “false proposal note” before the credit committee for immediate disbursement of ₹25 crore. “Of this, the bank deducted ₹15.5 crore from the loan amount towards processing fees and Sharma received ₹9.5 crore,” the FIR states.

In June 2016, the complainant alleged that he was coaxed by the bank officials to pay ₹47.37 crore. “In the event this amount isn’t paid then the processing fee amount and interest won’t be returned,” the FIR accessed by ET reads.

Subsequently, in September 2016, the loan was sold to an ARC. “The accused bank officials doctored minutes of the credit meetings, issued false statements and subsequently sold the loan to an ARC without my knowledge. While my liability was of ₹9.5 crore, the ARC in connivance with the bank officials staked a claim of ₹120 crore from my mortgaged assets which is worth over ₹1,200 crore,” Sharma told ET.



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Five foreign investors shortlisted for majority stake in Yes Bank-backed ARC, BFSI News, ET BFSI

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Five foreign investors have made presentations to the Yes Bank management to form a new joint venture asset reconstruction company (ARC) which will house the lender’s non performing assets (NPAs), three people familiar with the development said.

The investors which have made presentations include Los Angeles based $149 billion Ares-SSG Capital, $15 billion alternative investment firm Varde Partners, US based $55 billion Ceberus Capital and distressed asset giants $156 billion Oaktree Capital and private equity company JC Flowers, three people familiar with the move said. Individual investors and Yes Bank could not be immediately reached.

Yes Bank will likely hold a minority share in the proposed ARC in line with Reserve Bank of India (RBI) directions. The selected investor is likely to hold a majority as much as 80% to 85% in the new venture, one of the persons said. EY is helping Yes Bank with the process.

“The model is more of a NARC type. Banks are not encouraged to hold a major share in any ARC. That’s why they are selling it,” said a second senior executive involved in the matter.

He was referring to the government backed National Asset Reconstruction Co (NARC) which has been formed to resolve legacy bad loans from the banking sector.

“Investors have not yet been officially informed about the short listed firms so the process will take some more before the partner is selected,” said a third person familiar with the matter.



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RBI allows banks to sell fraud NPAs to ARCs, BFSI News, ET BFSI

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In a move that will help banks unload a major chunk of their non-performing assets (NPAs) to the bad bank, RBI has allowed the sale of loan accounts classified as fraud to asset reconstruction companies (ARCs). Earlier, banks were barred from selling NPAs classified as fraud, which had left them saddled with a resolution of several large accounts.

Banks are targeting to sell Rs 2 lakh crore worth of NPAs to the bad bank or the National Asset Reconstruction Company (NARCL) for recovery. However, they have hit a roadblock in respect of accounts that have been classified as fraud, as they were not allowed to sell them. RBI has now allowed banks to sell fraud accounts, provided the transferee is not connected to the borrower.

RBI has also said that responsibilities of the transferor with respect to continuous reporting, monitoring, filing of complaints with law enforcement agencies and proceedings related to such complaints shall also be transferred to the ARC. “The transfer of such loan exposures to an ARC, however, does not absolve the transferor from fixing the staff accountability as required under the extant instructions on frauds,” RBI said.

“Due to forensic audit in all big NPAs, in last three years, advances amounting Rs 3.83 lakh crore were declared as fraud accounts. This chunk of NPAs will be available for sale to ARCs,” Hari Hara Mishra, director, UV ARC, said.



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RBI allows banks to sell fraud loans to asset reconstruction companies

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The guidelines said that lenders must put in place a comprehensive board-approved policy for transfer and acquisition of all loan exposures.

The Reserve Bank of India (RBI) on Friday allowed banks to sell fraud loan exposures to asset reconstruction companies (ARCs). Banks will now be able to transfer to ARCs loan exposures classified as fraud as on the date of transfer, provided that the responsibilities of the bank with respect to continuous reporting, monitoring, filing of complaints with law enforcement agencies and proceedings related to such complaints shall also be transferred to the ARC.

“The transfer of such loan exposures to an ARC, however, does not absolve the transferor from fixing the staff accountability as required under the extant instructions on frauds,” the RBI said in its master direction on transfer of loan exposures.

The guidelines said that lenders must put in place a comprehensive board-approved policy for transfer and acquisition of all loan exposures. These guidelines must lay down the minimum quantitative and qualitative standards relating to due diligence, valuation, requisite IT systems for capture, storage and management of data, risk management and periodic board-level oversight.

The board-approved policies of every lender on transfer or acquisition of stressed loans shall cover the norms and procedure for transfer, the valuation methodology to be followed, delegation of powers to various functionaries for taking decisions on the transfer of loans, stated objectives for acquiring stressed assets and the risk premium to be applied.

When negotiated on a bilateral basis, the negotiations must necessarily be followed by an auction through the Swiss challenge method if the aggregate exposure of lenders to the relevant borrower is `100 crore or more. In all other cases, the bilateral negotiations shall be subject to the price discovery and value maximisation approaches adopted by the transferor as part of the board-approved policy, the RBI said.

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Bad Bank to solve Rs 2 lakh crore bad loans, take NPAs off banks’ books; here’s how it will work

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Finance Minister Nirmala Sitharaman on Thursday announced that the Union government will guarantee Rs 30,600 worth of security receipts issued by the National Asset Reconstruction Company.

The Bad Bank is finally here, after a decade of discourse. It aims to help clean up banks’ books by taking over Rs 2 lakh crore bad loans. If it works as intended, Bad Bank may help cut system-wide bank NPAs (non-performing assets) by over 1%, and help recover some of bad debts too, analysts say. The National Asset Reconstruction Company (NARCL), as it is officially named, will acquire banks’ bad debt to resolve or liquidate. It will buy these stressed assets for a mix of cash, and government-guaranteed security receipts.

Finance Minister Nirmala Sitharaman on Thursday announced that the Union government will guarantee Rs 30,600 worth of security receipts issued by the National Asset Reconstruction Company (NARCL). “NARCL will acquire stressed assets through 15% cash payment to banks based on valuation and the rest 85% will be given as security receipts,” Nirmala Sitharaman said. The government-backed security receipts can only be invoked on resolution or liquidation.

What is NARCL? Why is it needed?

The National Asset Reconstruction Company (NARCL) was proposed by the Finance Minister in her Union Budget speech. NARCL, popularly known as Bad Bank, will function as an asset reconstruction company set up by banks to resolve stressed assets for smoother functioning. Public sector banks will have 51% ownership in NARCL. The bad bank intends to resolve stressed loan assets above Rs 500 crore each.

How the Bad Bank will work

Bad loan transfer: NARCL will take over bad loans worth Rs 2 lakh crore from banks, of which Rs 90,000 crore will be taken over in the first phase. The Ministry of Finance said that NARCL will acquire bad loans from banks for a mutually agreed-upon value (understandably, a net value after a haircut). NARCL will pay 15% of the agreed net value of the bad debt upfront in cash and the remaining 85% in form of security receipts. The banks would use this 15% cash upfront to reverse the debt write down. As for the security receipts for the remaining 85%, the bank would redeem those when the bad bank resolves or liquidates the bad debt; or, the bank may also trade these securities for cash.

Provision write-back: “These loans are fully provided in the books of the bank. The upfront cash received, 15% of the written-down value, would be reversed while the provisions for the balance (value of security receipts) are unlikely to be reversed even if it is fully provided,” analysts at Kotak Securities wrote in a note. “The larger release of provisions, if any, would be made as and when the cash is received on sale of these receipts or redemption of security receipts. The government guarantee on SRs can enable trading of these securities,” Kotak Securities added.

Government guarantee: The security receipts issued by NARCL are backed by the Union government guarantee. The government guarantee will cover any shortfall between the face value of the receipts and the actual realisation value of the bad loan.

Resolution is key

“How efficiently the professionals are resolving the stressed assets is to be monitored. One can argue that bad bank is likely to become a warehouse for stressed loans without expected recovery as it will be difficult to find buyers for legacy assets,” ICICI Securities said in a note. The Resolution of the proposed Rs 2 lakh crore of legacy stressed assets will lower GNPLs (gross non performing loans) by more than 2%, the note said. The estimated realisable value of 18% will lead to provisioning write-back of Rs 36,000 crore. “Through successful execution of phase-1, one can expect near term NPA reduction of >1% and NPA recoveries equivalent to 10bps of system credit,” ICICI Securities said.

Why is government guarantee needed?

The government said that resolution mechanisms of dealing with a backlog of NPAs typically require a backstop from the Government. “This imparts credibility and provides for contingency buffers. Hence, a Government Guarantee of up to Rs 30,600 crore will back Security Receipts (SRs) issued by NARCL. The guarantee will be valid for 5 years. The condition precedent for invocation of guarantee would be resolution or liquidation,” the finance ministry said.

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Lenders set up bad bank for loans in default, BFSI News, ET BFSI

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Mumbai: Public sector lenders led by Canara Bank have officially formed the bad bank — the National Asset Reconstruction Company (NARC). Their next step now is to obtain approval from the Reserve Bank of India (RBI) to function as an ARC.

In May, banks decided to appoint Padmakumar M Nair, chief general manager in charge of stressed assets in SBI, as the MD of the NARC. According to RBI norms, an ARC should have minimum net owned funds of not less than 15% of the total financial assets that it plans to acquire on an aggregate basis or Rs 100 crore.

According to industry sources, lenders have identified 22 asset loan accounts worth Rs 82,496 crore. Assuming a book value of half the loan amount, the ARC would have to pay out around Rs 6,000 crore to purchase the assets. This is because the RBI norms require that 15% of the value of the asset has to be paid in cash, while the rest can be paid for by issuing security receipts (SRs). These SRs entitle the holder to a share of the recovery effected by the ARC.

To make the SRs more attractive to buyers, the government will guarantee recovery of up to Rs 31,000 crore. Lenders said that the objective of the guarantee was to provide comfort to investors and the average recovery is usually higher than the guaranteed amount provided. The notification in respect of the guarantee is likely after NARC obtains a registration from the RBI.

The loans that have been approved for transfer to the ARC include Videocon Oil Ventures (Rs 22,532 crore), Amtek Auto (Rs 9,014 crore), Reliance Naval (Rs 8,934 crore), Jaypee Infratech (Rs 7,950 crore), and Castex Technologies (Rs 6,337 crore).



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ARCs bank on retail loans in pandemic shift and bad bank competition, BFSI News, ET BFSI

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As the bad bank is set to take away the big chunk of their business, asset reconstruction companies (ARCs) are thinking smaller to grow big.

ARCs have been banking on retail loans to drive business in the pandemic-hit FY21 and see the share of retail loans reaching 50% of the pie.

The ARCs are also hit by the RBI-mandated loan restructuring and moratoriums, which had led to a drop in bad loans among corporates,

The Rs 1.5-lakh-crore asset reconstruction market comprises over a dozen players. The upcoming national bad bank will add to the competition in the market and lead to distortion due to government guarantees.

The pandemic-hit FY21 saw tepid overall growth for ARCs, but retail loan portfolio grew faster adding at least 25 per cent more to the assets under management (AUM).

Retail growth

Lenders like HDFC Bank, Indusind Bank, IDBI Bank, Federal Bank and non-banks like Bajaj Finance among others have been aggressively selling their stressed retail books — auto, home and personal loans as well credit cards dues to ARCs like Edelweiss, Phoenix ARC run by Kotak Mahindra Bank, JM Financial and Reliance ARC among others since the past few years.

While Reliance ARC snaps up only retail loans, Phoenix ARC has 20 per cent of its Rs 8,500-crore total book/AUM as retail loans.

Edelweiss ARC, which has AUM of Rs 40,8000 crore, and has made a recovery of Rs 5,400 crore in FY21 from 179 accounts. The company expects about around 50 per cent of overall ARC assets coming in from retail loans in the next two years from the 10% now. On industry level, the share of retail in ARCs is around 20%.

Why retail loans?

In the past two years retail loans are rising, while corporate NPAs are coming down due to the moratorium and restructuring allowed by the Reserve Bank, which has led to a rise in interest in retail loans.

Retail loans give higher margins and better recovery rates despite the high costs.

ARCs which focus on retail portfolio may be better placed to cushion the impact of the national bad bank on their business, as the proposed national ARC will primarily be dealing with large chunky loans of Rs 500 crore and above and that too mostly from public sector banks which have the highest bad loans piles. So to secure their business, it makes better sense for ARCs to focus on retail loans as it offers better margins and faster resolution too, he adds.

However, the retail book may not grow too big for too long as once the pandemic situation normalises and large corporate books may come up for sale.

The national bad bank will leave the field uneven for private players like us due to the proposal of government guarantee.



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Banks likely to transfer about 80 large NPA accounts to NARCL, BFSI News, ET BFSI

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Banks are likely to transfer about 80 large NPA accounts for the resolution to National Asset Reconstruction Company Ltd (NARCL), which is expected to be operational by next month.

NARCL is the name coined for the bad bank announced in the Budget 2021-22. A bad bank refers to a financial institution that takes over the bad assets of lenders and undertakes resolution.

The size of each of these NPAs accounts is over Rs 500 crore and the banks have identified about 70-80 such accounts to be transferred to the proposed bad bank, sources said.

It is expected that NPAs over Rs 2 lakh crore will move out of the books of the banks to the bad bank, they added.

The company will pick up those assets that are 100 per cent provided for by the lenders.

Finance Minister Nirmala Sitharaman in the Budget 2021-22 announced that the high level of provisioning by public sector banks of their stressed assets calls for measures to clean up the bank books.

“An Asset Reconstruction Company Limited and Asset Management Company would be set up to consolidate and take over the existing stressed debt,” she had said in the Budget speech.

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

Last year, the Indian Banks’ Association (IBA) had made a proposal for the creation of a bad bank for swift resolution of non-performing assets (NPAs). The government accepted the proposal and decided to go for asset reconstruction company (ARC) and asset management company (AMC) model for this.

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 a loss against the threshold value.

The Reserve Bank of India (RBI) has said that loans classified as fraud cannot be sold to NARCL. As per the annual report of the RBI, about 1.9 lakh crore of loans have been classified as fraud as of March 2020.

To facilitate the smooth functioning of asset reconstruction companies, the RBI last month decided to set up a panel to undertake a comprehensive review of the working of such institutions.

After enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act in 2002, regulatory guidelines for ARCs were issued in 2003 to enable the development of this sector and to facilitate the smooth functioning of these companies.

Since then, while ARCs have grown in number and size, their potential for resolving stressed assets is yet to be realised fully.



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Padmakumar Nair to take charge of NARCL

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State Bank of India’s Padmakumar Madhavan Nair is set to take charge as the chief of the National Asset Reconstruction Company Ltd (NARCL), which is being set up by banks, especially from the public sector, to tackle stressed assets.

Nair is currently Chief General Manager with SBI’s Stressed Assets Resolution Group.

The Indian Banks’ Association (IBA) is spearheading the formation of NARCL in consultation with the Finance Ministry and the Reserve Bank of India. Stressed assets with principal outstanding of ₹500 crore and above, aggregating about ₹1.50 lakh crore, are expected to be transferred to NARCL. Like other ARCs, NARCL too will have to invest in at least 15 per cent of the Security Receipts (SRs) it issues to acquire stressed assets, according to industry experts. Further, the Government may give a guarantee for SRs.

Union Finance Minister Nirmala Sitharaman, in her union budget speech on February 1, 2021, observed that the high level of provisioning by public sector banks on their stressed assets calls for measures to clean up their books.

In this regard, she said an Asset Reconstruction Company and an Asset Management Company 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 (AIFs) and other potential investors for eventual value realisation.

“We need to look at various aspects like regulations, different approvals needed, and processes. There are multiple things that need to be looked at,” said Rajkiran Rai G, MD & CEO, Union Bank of India. Rai is also the Chairman of IBA.

At a recent press meet, Rakesh Sharma, MD & CEO, IDBI Bank, said large public sector and private sector banks will be investing in NARCL, with each bank taking less than 10 per cent stake. IDBI Bank will also consider investing in the company.

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SBI MD, BFSI News, ET BFSI

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State-run lenders will take a lead in creation of the bad bank, but the sick asset resolution platform needs the support of private banks and other lenders to be successful, State Bank of India Managing Director Swaminathan J said on Thursday. If all lenders come on board, the National Asset Reconstruction Company (NARC) announced in the budget will be able to aggregate 100 per cent of a sick company’s outstanding loans, which shall ultimately lead to better resolution of the asset quality stress for all.

The government is yet to announce the specific contours of the NARC or the bad bank and has also only said that it is willing to provide some sovereign guarantee to help the platform.

“For this model to succeed, it cannot just be mostly for public sector banks. Yes, they will take a lead role in this but as we understand at this point of time, NARC will be all encompassing. It will take into account PSBs, private sector banks and for that matter any financial institution which has an exposure to the identified account,” Swaminathan said, speaking at an online seminar.

The present set of over two dozen ARCs have not been able to achieve decent numbers on debt aggregation and get stuck under 40 per cent in many cases, which has a bearing on the final resolution as well, he said.

“This ARC (the bad bank), since it is mandated and backed by the government, it is going to be a smoother affair in terms of all the banks deciding together to transfer the entire asset. Which means that the aggregation is going to be near 100 pc and there is going to be an AMC structure. So, together, we expect this to be a winning formula,” the confident SBI executive said.

“We are ‘very close’ for the bad bank to be a reality” and added that the dual structure of being both an asset reconstruction company as well as an asset management company will be of help, he said.

At present, financial industry stakeholders are being reached out to gauge their interest and one of the entities will take the lead once the potential shareholders are in place.

The lead bank or financier will have a stake of over 100 per cent, and apply to the RBI for licence to operate as an ARC, he said, stressing that funding or capital is not a problem for the bad bank.

The bad bank will operate on the prevalent 15:85 structure, where only 15 per cent will be paid as cash and the rest would be security receipts, he said, adding that this model will ensure that the fund initial fund requirements are not very high.

He said there is a group within the country’s largest lender working out a slew of modalities, including the potential assets which can be transferred to the NARC, capital required etc.

One of the unanswered aspects which will eventually get solved is the ways to put a value to the government guarantee which will ride alongside the security receipts.

Explaining the ways of working, he said NARC will offer a specific price for an asset to the banks and await the nod from the joint lenders forum to go ahead with a resolution. Once the amount is quoted, the lenders can reach out to other ARCs in the system and NARC will have the opportunity to revise its bid as well, he said, adding that there is a scope for price discovery.

A majority of lenders will have to be on board before the asset is transferred to NARC, he said, adding that the definition of ‘majority’ is likely to be the one as done by the Insolvency and Bankruptcy Code.



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