Tag: NARCL

Private banks too want the bad bank pie, BFSI News, ET BFSI

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With public sector banks queueing up to buy a bad bank stake, private lenders are also looking to invest in it.

Some private banks are seeking approvals to buy into National Asset Reconstruction Company Ltd (NARCL) or bad bank, though their stake will be lower than the PSBs.

Having secured a licence from the Registrar of Companies, the Indian Banks’ Association (IBA) will soon move an application to the Reserve Bank of India (RBI) to set up a Rs 6,000-crore National Asset Reconstruction Company Ltd (NARCL) or bad bank.

The process

With the registration of the company, the process for putting an initial capital of Rs 100 crore is on as per the guidelines, the sources said adding that the next step will be audit and then move an application to the RBI seeking a licence for the asset reconstruction company.

The RBI in 2017 raised the capital requirement to Rs 100 crore from the earlier level of Rs 2 crore keeping in mind the higher amount of cash required to buy bad loans.

Legal consultant AZB & Partners has been engaged for seeking various regulatory approvals and fulfilling other legal formalities.

The initial capital would come from eight banks who have committed, and the NARCL would expand the capital base to Rs 6,000 crore subsequently after the RBI’s nod.

Other equity partners would join after the RBI’s licence and even the board would be expanded.

SBI veteran to steer

IBA, entrusted with the task of setting up a bad bank, has put a preliminary board for NARCL in place. The company has hired P M Nair, a stressed assets expert from the State Bank of India (SBI), as the managing director. The other directors on the board are IBA Chief Executive Sunil Mehta, SBI Deputy Managing Director S S Nair and Canara Bank‘s Chief General Manager Ajit Krishnan Nair.

Finance Minister Nirmala Sitharaman in 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.

Several banks are moving to divest their stake from Asset Reconstruction Companies (ARCs) to free up capital in preparation to launch the bad bank.

Three public sector banks—Union Bank of India, Indian Bank, and Bank of India—said they jointly intend to sell up to 88.4 million shares, constituting up to 90.31 per cent of the total equity share capital of ASREC India Ltd, a Mumbai based ARC.



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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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NARCL may prompt existing ARCs to reorient their business: ARCIL Chief

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The National Asset Reconstruction Company Ltd, (NARCL), which is slated to become the mother of all Asset Reconstruction Companies (ARCs), will prompt existing ARCs to change their business orientation and start focussing on buying the stressed retail and MSME assets, according to Pallav Mohapatra, MD & CEO, Asset Reconstruction Company (India) Ltd (ARCIL).

He emphasised that ARCs have a huge business opportunity to buy stressed assets aggregating about ₹1 lakh crore in the retail and micro, small and medium enterprise (MSME) segments.

Stressed assets with principal outstanding of ₹500 crore and above, aggregating about ₹2 lakh crore, are expected to be transferred by lenders to NARCL.

In an interaction with BusinessLine, Mohapatra, who was MD & CEO of Central Bank of India before taking the reins at ARCIL in March 2021, emphasised that there is enough scope for existing ARCs (28 at the last count) to buy stressed assets below ₹500 crore from Banks.

Excerpts

Will the setting up of NARCL, does not diminish the business prospects of existing ARCs?

NARCL’s mandate is basically to acquire stressed assets where the total exposure of the banking sector is more than ₹500 crore.

But I feel there is enough scope for getting the business (buying stressed assets) below ₹500 crore. As of today, most of the ARCs were playing in the big-ticket corporate stressed assets.

Now I feel they will change their orientation and start focusing on stressed retail and MSME assets where the size will increase in the backdrop of the Covid-19 pandemic. It (increase in size) will not be there in the case of corporates to a reasonably large extent. This is because, to a great extent, things have been sorted out. There will be a few cases but not as many as it used to be earlier. So, if the ARCs equip themselves with infrastructure, technology, and human resources skills to handle the stressed retail and MSME assets, that is going to be a very huge business opportunity for ARCs.

How big will the business opportunity be?

The business opportunity will be sufficiently large. The opportunity will be bigger than the total existing Assets Under Management (estimated at about ₹60,000 crore) of all the ARCs put together. This particular pool (of stressed retail and MSME assets) could be about ₹1 lakh crore.

Given that sale of stressed assets by banks to ARCs has been declining in the last couple of years, will ARCIL change tack?

We want to focus more on resolution and recovery of non-performing assets and earn income after some time rather than focusing on earning income from fees or some other structure.

If you look at the Profit & Loss accounts of ARCs, normally there are three channels of income — management fee income (for managing the acquired assets), interest income (arising from restructuring) and when ARCs can recover more than the face value of the Security Receipts, they get an upside income.

Our focus is to basically increase the proportion of the upside income. This will have beneficial effects — one is there will be a better churning of the capital in ARCs; second, they will also be earning income, with the upside income going straightaway to P&L; and third is it will be good for the economy as such because there will be recovery and resolution.

So, instead of focusing on earning management fees, which will cover our capital investment, we are looking at earning income, as far as possible, by doing resolution and recovery.

Banks want to sell stressed assets on all cash basis but capital could be constraint for ARCs. How do you deal with this situation?

Banks want all-cash deals because of the non-redemption of SRs. If they know that ARCs are going to redeem the SRs as well as give them upside income, why will they not sell their stressed assets for a mix of cash and SRs?

From the capital and availability of funds point of view, ARCIL doesn’t have a problem. Even if there is a funding gap, we always try to get some investor. If we are doing a 100 per cent cash deal with a bank, we try to pay 100 per cent to the bank. But when it comes to our capital deployment, we try to make it 15 per cent or a maximum of 20-25 per cent, and we always get an investor who will put the money. Now, the advantage of this is that since the investor is putting in 75-85 per cent of the money, they will be very keen on resolution of the assets. The investors will not be keen that the ARC is earning the management fees they have to pay for. They will have regular interaction with the ARC because they want a return on their money. And investors are keen to work with those ARCs that have a very fair, open and transparent business model.

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Canara Bank to be lead sponsor of bad bank, to pick up 12% stake

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The Board of Canara Bank has given in-principle approval 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, the Bank said in a regulatory filing.

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.

Stressed consortium loans (₹500 crore and above) will be transferred to NARCL. Banks have so far identified 22 stressed assets aggregating about ₹89,000 crore for transfer to NARCL.

Overall, stressed loans aggregating up to ₹2 lakh crore are expected to be transferred by Banks to the company.

Padmakumar Madhavan Nair (Chief General Manager with SBI’s Stressed Assets Resolution Group) has been appointed as MD & CEO of NARCL.

In her Union Budget speech on February 1, 2021, Finance Minister Nirmala Sitharaman said that an Asset Reconstruction Company (ARC) and an 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 and other potential investors for eventual value realisation.

Indian Banks Association (IBA) is the Nodal Agency for constituting the ARC and AMC, designated as National Asset Reconstruction Company Ltd (NARCL) and India Debt Management Company Ltd (IDMCL), respectively.

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Public sector banks list Rs 82,500 crore NPAs for bad bank, BFSI News, ET BFSI

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Public sector banks have shortlisted 28 loan accounts to be transferred to the National Asset Reconstruction Company (NARCL). Of these, lead banks have completed the process of obtaining approval from co-lenders in 22 accounts with Rs 82,500 crore of loans due. Within this amount, borrowers such as VOVL, Amtek Auto, Reliance Naval, Jaypee Infratech, Castex Technologies, GTL, Visa Steel and Wind World account for 80%.

Other large companies that are to be sold to the NARCL include Lavasa Corporation, Ruchi Worldwide, Consolidated Construction and a few toll projects.

According to banking sources, work is progressing on multiple fronts to ensure that the bad bank starts operations as soon as possible. On Wednesday, bankers met to finalise the capital structure of the bad bank (NARCL). Sources said that the company would need at least Rs 6,000-crore capital of equity and debt to start operations. In terms of Reserve Bank of India (RBI) regulations, asset reconstruction companies (ARCs) must pay 15% of the purchase consideration in cash upfront. Even if these 22 non-performing assets (NPAs) were valued at 50% of the loan amount, the ARCs would have to pay over Rs 12,000 crore to banks. The NARCL can, however, raise money on its own.

Since all these 28 loans have been fully provided for, any consideration that the banks receive will go into their bottom line as profit. Once the capital structure is finalised, the promoters will seek a licence from the RBI. Lenders have decided to ask power finance companies to be the promoters as most other large lenders have a stake in existing ARCs. While all banks will hold just below 10% stake, Canara Bank and Bank of Maharashtra will hold just over 10% and may be given promoter status. Most other large banks will contribute to the ARCs’ equity. The articles of association of the NARC have already been finalised. Simultaneously, lenders are also discussing the setup of the asset management company that will do the recovery work. Lenders are hopeful of completing the loan transfer to the NARCL in July.

Finance minister Nirmala Sitharaman had announced in the Budget the setting up of a bad bank (NARCL) to acquire the NPAs from banks. The NARCL was to be in the public sector so that lenders do not have any problems in selling their bad loans. The NARCL would pay 15% in cash and the balance in security receipts, which are similar to units in a mutual fund with the consolidated bad loan being the underlying asset. The government would provide a guarantee to the security receipts issued by the bad bank, which would improve their valuation.

Besides the loans having been fully provided for, the other requirement was that each loan should be above Rs 500 crore. Also, loans that were classified as fraud or were in the midst of a liquidation process were not eligible. Many of these large accounts are undergoing recovery proceedings by banks and buyers have shown interest in these companies. The consolidation of loans will enable faster decision-making by the NARCL.



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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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NARCL to further Govt’s agenda of disinvestment of IDBI Bank, privatisation of PSBs

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The National Asset Reconstruction Company Ltd (NARCL), currently being put together by banks and other lenders, may structurally alter the balance-sheets of banks in such a way that it will further the Government’s agenda of divesting its stake in IDBI Bank and privatising two public sector banks (PSBs).

Once chunky stressed assets are out of the books, the valuation of these banks will improve, making them more saleable, opine market experts.

This can help the government realise more value from the proposed sale of its 45.48 per cent stake in IDBI Bank to a strategic buyer as well as privatisation of two PSBs.

Ramnath Krishnan, President-Ratings & Chief Rating Officer, ICRA, observed that NARCL might structurally help with disinvestment in state-owned banks should the Government consider this in the future. “It might structurally alter the balance-sheets of certain banks, which could make them more saleable should disinvestment be an opportunity seriously considered by the Government,” Krishnan said.

Referring to IDBI Bank’s healthy provision coverage ratio (PCR), Mangesh Kulkarni, Research Analyst, Almondz Global Securities, assessed that with most of its legacy assets being provided for 100 per cent, it can straight away transfer them to NARCL. So, the path to divestment of Government’s stake in IDBI Bank and privatisation of two PSBs will be streamlined once NARCL starts operations, he added.

IBA sets the ball rolling

The Indian Banks’ Association (IBA) has set the ball rolling on NARCL with the appointment of State Bank of India’s Padmakumar M Nair as its new Chief. Nair is currently Chief General Manager with SBI’s Stressed Assets Resolution Group.

NARCL is being set up following Finance Minister Nirmala Sitharaman’s FY2022 Budget announcement that the high level of provisioning by public sector banks on their stressed assets calls for measures to clean up the bank books.

Stressed assets with principal outstanding of ₹500 crore and above, aggregating about ₹1.50- lakh crore, are expected to be transferred to NARCL.

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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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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