Tag: bad bank

NARCL will have negligible short-term impact for banks: Kotak Securities report

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The National Asset Reconstruction Company Ltd (NARCL),which is being put together by public sector banks and a few private sector banks to clean up their bad loans, will have negligible short-term impact as the upfront cash received is a smaller proportion and divided across banks, according to a Kotak Securities Ltd (KSL) report.

Government guarantee, aggregating ₹30,600 crore, to the cecurity receipts (SRs) to be issued by NARCL puts a 18 per cent floor on recovery rate, the report said.

The government guarantee on SRs can enable trading of these securities (that is converted into cash in secondary market).

“The upfront cash received, 15 per cent of the written-down value, will be reversed while the provisions for the balance (value of security receipts) are unlikely to be reversed even if it is fully provided.” said a team of six KSL analysts led by MB Mahesh.

As this cash is a smaller proportion and divided across public banks and a few private banks, the short-term impact is negligible, the analysts added.

They opined that 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 analysts felt that banks are unlikely to reverse any provisions based on their discussions with these banks in the past on this topic.

They assessed that a 15:85 (cash: SR) structure implies that the ₹30,600 crore guarantee would translate to ₹36,000 crore of marked-down value of NPLs.

So, the ₹2 lakh crore of NPLs (non-performing loans) purchase value would imply 18 per cent recovery rate.

“Today, the NPL recognition and provisions cycle is largely complete with some of the largest bad loans already resolved.

“Banks have about 90-100 per cent (provision) coverage on these assets, implying there is no management incentive to delay decision making,”the analysts said.

The NPLs (written-off or otherwise) exchanged for security receipts are fully provided but the analysts don’t expect banks to reverse provisions.

Major benefit

The report emphasised that the major benefit of NARCL would accrue through faster debt consolidation, potentially leading to quicker decision making and better recovery rates.

Further, senior management bandwidth would be released on solving these problems, which can be channelized towards identifying fresh segments for growth that has been tepid in recent years.

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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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NARCL will empower lenders, but recovery from 26 accounts is not easy, industry says, BFSI News, ET BFSI

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The National Asset Reconstruction Company Ltd (NARCL) will kill all communication gaps that bank consortiums face, and will speed up the process. But chances are high that the NARCL will face a tough time recovering from the 26 accounts that have been identified.

Finance Minister Nirmala Sitharaman on Thursday said that the government has allocated more than Rs. 30,600 crore to the NARCL. The government will transfer the funds to the bad bank, according to their calendar. The Cabinet has approved to set up the NARCL, backed by the government securities, she added.

Read: Finance Minister Sitharaman announces bad bank, Cabinet approves backing of up to Rs 30,600 crore on securities receipts

NARCL – sole decision maker

Industry veterans believe that NARCL will strengthen the recovery process.

“The first and foremost advantage is that the NARCL will provide consolidation of the debt. The debt, which is spread out in 10-20 different entities of the consortium or the multiple banking arrangement, will be consolidated into one entity, providing ease of resolution. In a multiple banking arrangement, there is always a difference of opinion, which makes it difficult to reach a resolution plan,” said Sunil Mehta, chief executive officer at Indian Banks’ Association.

The biggest benefit banks will have is that they will get 15% funds upfront from the NARCL as soon as they transfer the assets. In the current scenario, it takes months for bankers to get their first cheque after a rigorous process either at the National Company Law Tribunal or at Debt Recovery Tribunals.

Read: What are NARCL and IDRCL? How do they work and what is the plan?

“The intention and the idea behind bad banks is that all the bad loans of the banks are concentrated at one place so there will be one common decision making entity. This will make the execution of asset resolution far faster,” said Jyoti Prakash Gadia, managing director at Resurgent India.

NARCL will empower lenders, but recovery from 26 accounts is not easy, industry says
Operations and recovery

Public sector banks will hold 51% stake in the NARCL, while debt management and other financial institutions will hold 49%. NARCL will be managed by professionals, and non performing asset accounts, which are larger than Rs. 500 crore, will be transferred to it. Currently, banks have identified 26 accounts, worth around Rs. 90,000 crore, which the NARCL will take over from them.

The hope is that the government-backed bad bank will bring in the right value for the banks. Because in the current situation, liquidation is much higher compared with resolution, and lenders have taken more than 90% haircuts in many accounts, including Videocon Industries, Siva Industries etc.

But while NARCL will reduce the gaps and speed up the recovery, experts have their own doubts on its recovery ratio, considering the quality of 26 assets, which will be transferred.

“I am not sure if NARCL will be able to fully recover all the accounts mentioned in the list. However, it is still better than individual recovery,” said Gadia.

Recovery has always been a challenge for lenders. RBI Governor Shakikanta Das had recently highlighted that the total recovery from Lokadalat is 5%, from DRT is 6% and from SARFAESI is 20%. The highest recovery was from the Insolvency and Bankruptcy Code, which was 30-45% in earlier days, is now reduced to 5% amid the pandemic, Das said.

Hence, despite having an NARCL, the industry is not hoping for a significant recovery. “The major challenge is that assets mentioned in the list are not very lucrative and buyers will also offer the cheapest rate,” said an industry expert, who did not wish to be quoted.

Siby Antony, former MD and CEO of Edelweiss Asset Reconstruction and a veteran in the sector, believes that ARCs will be better at reviving assets, but is not very sure whether the NARCL will recover.

“I am not hopeful. Because these (the 26 accounts) are bad assets, and finally all will go under liquidation,” Antony said.

Watch: Bad bank can only be a warehouse of bad assets, says Siby Antony



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Finance Minister Sitharaman announces bad bank, Cabinet approves backing of up to Rs 30,600 crore on securities receipts, BFSI News, ET BFSI

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Finance Minister Nirmala Sitharaman today announced the much-awaited bad bank, and said that the Union Cabinet approved on Wednesday the sovereign backing of up to Rs 30,600 crore for the securities receipts.

The planned National Asset Reconstruction Company Ltd (NARCL) will issue securities receipts to banks as it takes on non-performing assets from their books. These securities receipts will be valid for five years.

“The idea behind it is to ensure value locked within assets is used making banking system robust. So limit provides an incentive for banks. If process delayed beyond 5 years, guarantee can’t be invoked,” Sitharaman said.

Read: What is a bad bank and why is it needed?

The NARCL will pay up to 15% of the agreed value for the loans in cash and the remaining 85% would be government-guaranteed security receipts, the finance minister announced. State-owned banks will hold 51% stake, while FIs or debt management companies will hold 49%.

Financial Services Secretary Debasish Panda said the government will not face any fiscal outgo for the guarantees it provides to banks. NPAs worth Rs 2 lakh crore will be sent to the NARCL, and of this Rs 90,000 crore will be transferred in the first phase.

Along with NARCL, the government will also set up an India Debt Resolution company. The service company will manage assets and loop in market professionals and turnaround experts. Public sector banks and public FIs will hold a maximum of 49% stake and the remaining will be held by private banks.

Watch: Bad bank can only be a warehouse of bad assets, says Siby Antony

The banks’ asset quality review had happened in 2015, which had revealed very high incidence of NPAs. After recognition, quantification of NPAs started in a planned manner and state owned banks, in the last six years, recovered Rs 5,01,479 crore, she said.

In 2018, just two out of 21 public sector banks were profitable. But in 2021, only two banks reported losses, Sitharaman added.

Watch: Bad bank to preserve value, timely sale of stressed assets: IBA CEO

During the Union Budget 2021-22, Sitharaman had announced the creation of NARCL or bad bank to resolve large cases of stress. The bad bank will manage and dispose the assets to alternate investment funds and other potential investors for eventual value realisation, she had said.

In August, the Indian Banks’ Association (IBA) moved an application to the Reserve Bank of India (RBI) seeking licence to set up a the Rs 6,000-crore bad bank. The NARCL was incorporated last month in Mumbai, following the registration with Registrar of Companies.



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Banks to start credit outreach programme later this year: Finance Minister

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Banks are set to start a credit outreach programme later this year under which they would go to every district of the country, Finance Minister Nirmala Sitharaman said on Wednesday, adding that they have also been asked to provide sector-specific support.

Wrapping up her two-day trip to Mumbai, the Finance Minister said she has asked banks to interact with export promotion agencies to help address exporters’ requirements and also look at providing support to sunrise sectors as well as fintechs.

Banks have also been asked to come up with specific schemes for the North-East, Sitharaman told presspersons.

She also highlighted that high CASA deposits in the eastern States are a matter of concern and said banks should give a greater credit expansion facility in the region.

The Finance Minister also noted that public sector banks have done well collectively and are in a position to go to the market to raise funds.

Debasish Panda, Secretary, Department of Financial Services, said banks were in the process of raising about Rs 12,000 crore from the markets this fiscal.

While she did not comment on questions relating to privatisation of public sector banks and general insurance companies, she stressed that the government will have bare a minimum presence in strategic sectors.

“Banks, financial services and insurance have been identified as strategic sectors,” she stressed.

‘Bad bank close to getting a licence’

Sitharaman said the proposed bad bank is close to getting a licence. Panda said the Indian Banks’ Association has applied to the RBI and a licence for the bad bank is expected soon. Projects have also been identified, he said.

National Monetisation Pipeline

The FM also stressed that there will be no change of ownership under the National Monetisation Pipeline and ownership of assets will remain with the Union Government.

“These are brownfield assets but are under utilised,” she said in response to a query.

Taking on Opposition concerns, she questioned who had monetised the Mumbai-Pune Corridor and taken out a Request for Proposal for the New Delhi Railway Station.

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Bad bank incorporated in Mumbai, RBI licence likely soon, BFSI News, ET BFSI

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The bad bank, which was proposed in the Union Budget this year, is moving fast to start operations.

The bad bank was registered as National Asset Reconstruction Co Ltd on July 7 with the Registrar of Companies, Mumbai with a paid-up capital of Rs 74.6 crore.

Lenders now plan to approach the Reserve Bank of India for a licence to start operations of the national asset reconstruction company, or bad bank, which was incorporated recently.

Taking shape

State-owned Canara Bank will be the lead sponsor of National Asset Reconstruction Company Limited with a 12 per cent stake in the entity.

The bad bank will be headed by Padmakumar Madhavan Nair, a stressed assets expert from the State Bank of India (SBI), as the managing director. Indian Banks’ Association chief executive Sunil Mehta, SBI deputy managing director Salee Sukumaran Nair and Canara Bank’s representative Ajit Krishnan Nair are the other directors of the bad bank.

Nair has been picked up for the CEO post of the proposed bad bank NARCL as he has a long exposure of handling resolution of stressed assets, they said. He will be joining the company on deputation basis for the moment.

Banks have identified 22 bad loans totalling Rs 89,000 crore to be transferred to the NARCL in the initial phase.

The State Bank of India plans to transfer bad loans worth around Rs 20,000 crore to the bad bank.

The Budget announcement

Finance Minister Nirmala Sitharaman in the budget for 2021-22 had announced that an asset reconstruction company or a bad bank would be set up to consolidate and take over existing stressed assets of lenders and undertake their resolution. Bad bank refers to a financial institution that takes over bad assets of lenders and undertakes resolution.

The new entity is being created in collaboration with both public and private sector banks. Sitharaman in the Budget 2021-22 had mentioned that the high level of provisioning by public sector banks of their stressed assets called 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. 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.

Government guarantees

The government guarantee would be invoked if there is a loss against the threshold value. Last year, Indian Banks’ Association 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 the asset reconstruction company (ARC) and asset management company (AMC) model for this. The Reserve Bank of India 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.



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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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‘Bad bank’ is legally born, as NARCL gets incorporated with Corporate Affairs Ministry

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The much-awaited bad bank — National Asset Reconstruction Company Ltd (NARCL) — has been incorporated, with the Corporate Affairs Ministry giving legal recognition few days back.

The NARCL — announced in this year’s Budget — will next approach the Reserve Bank of India for obtaining licence as an Asset Reconstruction Company (ARC).

“Registrar of Companies (RoC) Mumbai has given the registration for incorporation of NARCL. The other formalities are now being taken up,” sources close to the development said.

The capital structure will have a component of both equity and debt, they added. Public sector banks led by Canara Bank (which is likely to have 12 per cent stake) are expected to hold controlling stake in NARCL.

The other banks that are expected to pump in capital include State Bank of India, Bank of Baroda, Bank of India and IDBI Bank.

NARCL may eventually get capitalised about ₹7,000 crore.

The government will not have any direct equity contribution to NARCL. It will guarantee the security receipts issued by NARCL, which will buy the bad loans from banks. The Centre has earmarked ₹31,000 crore for the guarantees.

22 assets identified

Already, PSBs have identified 22 assets (stressed consortium loans of over ₹500 crore) worth about ₹82,500 crore that will be transferred to the bad bank in phases. In the long run, stressed assets worth as much as ₹2-lakh crore are expected to be transferred to NARCL.

The NARCL is expected to stick to the existing industry practice of paying 15 per cent in cash and 85 per cent in security receipts.

Proposed in the Budget

It maybe recalled that this year’s Budget had proposed the setting up of an ARC along with an asset management company (AMC) (to be called India debt management company) to take over the stressed debt of banks. The AMC will be controlled by the private sector and would help around the stressed assets for recovery.

A bad bank is basically an entity that houses the bad loans (non-performing assets) of a bank and will resolve or liquidate bad debt (stressed debt) to recover as much money as it can.

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Success of a bad bank initiative will depend upon design aspects: RBI

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The Reserve Bank of India (RBI) said the aggregation of assets by the proposed National Asset Reconstruction Company Limited (NARCL) is expected to assist in turning around the assets and eventually offloading them to Alternative Investment Funds (AIFs) and other potential investors for further value unlocking.

Banks are understood to have identified 22 stressed consortium loans (₹500 crore and above) aggregating about ₹89,000 crore for transferring to NARCL, popularly termed as a “bad bank”.

According to RBI’s latest Financial Stability Report, drawing from established market principles and global experience, the success of a bad bank initiative would eventually depend upon design aspects.

The design aspects include fair pricing; complete segregation of risk from selling banks; investment of external capital; independent and professional management of the new entity; minimising moral hazard; and adequate capitalisation of the banks post-sale of assets to invigorate fresh lending.

The Board of Canara Bank had given in-principle approval on June 15, 2021, for participating in the National Asset Reconstruction Company Ltd (NARCL) as a sponsor by taking 12 per cent equity stake.

The Bengaluru-headquartered public sector bank has sought the Reserve Bank of India’s approval for the same.

Banks such as State Bank of India, Bank of Baroda, Bank of India and IDBI Bank are expected to take up to 10 per cent stake in NARCL.

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Banks, experts pin hopes on bad bank to cut NPA pile, BFSI News, ET BFSI

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The National Asset Reconstruction Company (NARC) is likely to help banks cut their bad loan piles.

The bad bank and healthy provisioning buffers against doubtful advances should help India’s banks mitigate the impact of delinquencies and asset quality slippages in the aftermath of the second Covid wave, according to Boston Consultancy Group.

The formation of National Asset Reconstruction Co Ltd will help lenders keep up the momentum of recovery in stressed assets in 2021-22 (Apr-Mar), State Bank of India Chairman Dinesh Kumar Khara said.

Along with the resumption of courts and the roll-out of pre-package for resolution through the insolvency law, this will help banks make judicious use of recovery options, Khara said.

The NARC would help reduce sticky assets exposure to 1.8% – 2.3% of total loans, BCG said.

Asset quality is still a major concern for many Indian banks even as nonperforming assets (NPA), on average, could be contained, the global consultancy firm said.

Asset quality

“The second wave of the coronavirus pandemic poses risk to asset quality even as banks retain healthy provisioning buffers,” it said.

Banks have identified 22 bad loans totaling Rs 89,000 crore to be transferred to the NARC in the initial phase.

The State Bank of India plans to transfer bad loans worth around 200 bln rupees to NARCL.

The report also said that bad loans sold to asset reconstruction companies (ARCs) as a proportion of banking system stressed assets increased to about 34% at the end of FY20, up from 25% in FY18, with banks taking a much higher haircut on these sales.

Haircuts on sales to ARCs have risen to 66% in FY20 compared to 62% in the prior financial period, it said.

The bad bank

The bad bank was proposed in the Union Budget for 2021-22.

In the last financial stability report released in January, the central bank said that banks’ gross non-performing assets may rise to 13.5% by September 2021 from 7.5% as of September 2020. In the event of extreme stress, the ratio could rise to 14.8%.

Former Reserve Bank of India deputy governor Rakesh Mohan has also warned that higher stress on assets in the banking system threatens financial stability.

Recoveries through various channels have bounced back to about 16% in FY20 from decadal lows of about 10% in FY16 before the pandemic struck.



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