At the group level, it is likely to recover 61% against the average 39% for IBC overall. The average IBC recoveries for the last fiscal had dropped to a quarter.
IL&FS is likely to recover Rs 61,000 crore assets from the group debt of Rs 99,000 crore as of October 2018, an increase of 5,000 crore over the earlier estimate.
“Between now and September 2021, we see this (Rs 43,000 crore of addressed debt) number going up in excess of Rs 50,000 crore. Thereafter, we are increasing our overall estimate of what we think we can resolve to Rs 61,000 crore, or close to 62 per cent, of the total debt,” Kotak said. The upgrade in potentially addressable debt by Rs 5,000 crore (to Rs 61,000 crore) has been largely on account of improved valuations, better operating performance and enhanced recoveries from non-group exposures, the Group had said in September. This includes the debt addressed through resolution, restructuring and liquidation across 347 IL&FS companies.
According to the quarterly newsletter of the Insolvency and Bankruptcy Board of India for March 2021, the recovery through resolution amounted to about 39% and through liquidation around 4%. According to bankers, recovery in the IBC process has had extreme outcomes.
The IL&FS playbook
As of end-March 2021, of the 347 entities, 186 have been resolved with Rs 43,000 crore of debt addressed.
The 347 companies in the group have been reduced to 167 and are expected to drop further to below 100 by the end of the year. This was done by shutting down or selling off a large number of foreign and local subsidiaries.
In the case of road projects, where conventional investors were spoilt for choice given the road projects on
While the new board has addressed a major chunk of the debt, the challenge is resolving IL&FS Financial Services and the remaining cases of dozens of companies where the amounts involved are relatively small. In the case of I-FIN, the board is understood to have dropped the plan to sell Rs 5,000 crore worth of loans after bids came in the range of 5%.
The earlier FSR released in January 2021 had projected that the gross non-performing assets (GNPAs) of banks may rise to 13.5% by September 2021 in the baseline scenario.
By Nitin Jain
In Feb 2021, RBI announced a structure for a proposed bad bank, “What you call a bad bank is not really that; an ARC-type entity will be set up to take over bad loans from the books of public sector banks and it will try to resolve just like any other ARC,” RBI Governor Shatikanta Das had said.
Proposed Structure of Bad Bank
Though no formal structure has been announced yet, we understand basis news reports, that a National Asset Reconstruction Company Limited (NARCL) is going to be set up to take over NPAs from banks. The Promoters are likely to be power finance companies while the PSU banks will hold the remaining equity stake in the ARC. As per recent news reports, state-owned banks have shortlisted 28 loan accounts to be transferred to the NARCL with a total of Rs 82,500 crore of loans due, and further loans could also be transferred such that the AUM is over Rs 2 lakh crore. The list of borrowers includes big names such as Videocon Oil Ventures Limited (VOVL), Amtek Auto, Reliance Naval, Jaypee Infratech, Castex Technologies, GTL, Visa Steel, Wind World, Lavasa Corporation, Ruchi Worldwide, Consolidated Construction.
Normally the NPA loans at the time of takeover by an ARC are valued around 30-40% of the principal amount. However, as we understand from news sources, in the case of NARCL the loans may be acquired at the current book value. The NARCL would pay 15% in cash and the balance 85% in security receipts or any other proportion as they may decide. Further, the government would provide a guarantee to the security receipts issued by the bad bank. Let’s assume that a bank sells a loan of Rs 100 to NARCL. Now, if the Bank has already made 75% provisions for the loan, then the book value of this loan is Rs 25, and 15% of Rs 25 i.e. Rs 3.75 is cash to be paid to banks. Thus, using these assumptions, for taking over say Rs 2 lakh crore of bad loans, a cash outflow of Rs 7,500 crores and issuance of SRs worth Rs 42,500 crore may be required. (Please note that these assumptions have been taken for the purpose of explaining this concept only and are not indicative or confirmatory in any nature).
Pros and Cons of the Proposed Bad Bank Structure
Pros -Cleans the balance sheet of the banks. -Will provide immediate relief to the banking system which will now be facing fresh NPA on account of disruption due to Covid. -Banks will become capitalized and ready for fresh lending. -Faster decision making by one body (NARCL) v/s Consortium of banks. -A secondary market can be created for the SRs which have a sovereign backing, that would provide further liquidity to the banks.
Con The actual recovery of these loans may be lower than the book value of the loans transferred, thereby could lead to erosion of capital at NARCL over the medium and long term. -If NARCL will need to take decisive, focused steps to recover these loans, otherwise the process may not be successful. -The process entails transferring the bad loans at current date, and recovery or resolution to happen in future. -May lead to aggressive fresh lending by Banks.
Taking control of management of these companies from the Promoters. The RBI had demonstrated effective management of DHFL, by taking over the board and appointing an administrator to manage the company and find a resolution.However, a Bad Bank, or even a network of bad banks, will not make the losses disappear. The losses, or non-performing loans, transferred to a bad bank will still exist. The process may allow better recovery of these loans in future. It will be important for the banks to review their lending policies and put in place a robust risk management system. Further, it would be crucial to see how NARCL will manage these bad assets. I believe that one will require specialized expertise for recovery of these bad assets such as:
-Interim Crisis Management in these Companies – restructuring, reducing costs, identifying surplus assets and to sell these assets to generate liquidity, and providing transparent and clear communications to all stakeholders. -Classification of bad loans by sector. The Government already has significant expertise in the Road/ Highways and Power Sector via its Undertakings. However, expertise may need to be built in other sectors via sector experts to facilitate day-to-day management of the operations of the company and to find a viable resolution to preserve value. -Provisioning policies of NARCL will need to be reviewed such that they are in accordance with the tenor/ maturity of the SRs issued. -NARCL will need to take a decision as to the route to be taken for recovery from the bad loan. Some potential routes could be:
Initiating corporate insolvency process on the Company
Engaging an investment banker to pursue mergers and acquisitions transaction for the said asset.
Undertake a compromise or settlement u/s 230 of Companies Act.
Though the ‘Bad Bank’ appears to be a sweet pill for the banking sector to get rid of their immediate problems, it would be a tough task ahead for the proposed NARCL to preserve the tax- payers’ monies over the medium and longer term.
(Nitin Jain is a veteran corporate and investment banker having worked in banks like Standard Chartered Bank and Bank of America. He is a Restructuring Expert and is also an Insolvency Professional registered with IBBI. The views expressed in the above article are the author’s personal views.)
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