Tag: national asset reconstruction company

Edelweiss ARC increasing investment to acquire stressed retail loans

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Edelweiss Financial Services’ stake in the ARC is currently 60%, while CDPQ Private Equity Asia, part of Canada’s pension fund CDPQ, holds 20%.

Edelweiss Asset Reconstruction Company (EARC), currently India’s largest private asset reconstruction firm, is increasing its investment to acquire more stressed retail loans from banks and non-bank lenders. Sales of stressed loans from the retail segment are picking up with lenders looking to resolve the problem of growing non-performing assets (NPAs) on their retail loan books.

According to Edelweiss ARC MD & CEO RK Bansal, the company currently has around five lakh accounts under its retail portfolio and has already become the largest player in the retail ARC space. “Retail NPA sales are picking up and many banks and NBFCs are looking to resolve the retail NPAs,” Bansal told FE.

“Banks’ wholesale loan books have already seen huge NPAs and they are now in resolution mode for these stressed assets. New NPAs in wholesale are less. We are seeing a higher level of NPAs now in retail, whether it is housing loans, loans against property, MSME loans or unsecured loans like personal loans and credit cards,” he said.

For the quarter ended September, EARC’s assets under management (AUM) stood at Rs 42,800 crore against Rs 42,400 crore in the same period a year ago. At the end of the second quarter this fiscal, capital employed for wholesale assets was at Rs 5,000 crore compared to Rs 5,200 crore for the corresponding period last fiscal. Notably, capital employed for retail assets rose to Rs 500 crore from Rs 100 crore a year ago.

“We feel that retail will grow much faster, at least for the next two-three years till the wholesale cycle comes back. Because as of now, banks have not lent much in wholesale on the corporate side for the last two-three years. The lending has been less because banks have been struggling with NPAs. So once the lending picks up, capex cycle will pick up. The cycle will take about two-three years more for fresh NPAs on the corporate side,” Bansal said.

Edelweiss ARC started its retail bad loans management operations around three years ago. “Currently, the AUM for our retail portfolio is around Rs 2,000 crore. Slowly, AUM for retail will grow. Retail AUM does not grow that fast because retail loans are very small and repayment is much faster than wholesale. So AUM keeps on coming down faster in retail,” he said.

Asked whether the National Asset Reconstruction Company (NARCL), the so-called bad bank, will reduce the growth opportunity for existing ARCs, Bansal said, “The answer is no. Because anyway these cases (transfer of toxic assets by banks) were not such where ARCs were interested. Because these cases are under the 15:85 structure, while in the case of private sector ARCs typically banks are not selling nowadays under 15:85. They are selling it to government ARCs, because they also know that nobody will pay them cash for these assets.”

NARCL is expected to witness the transfer of the first batch of toxic assets worth about Rs 90,000 crore by January 2022.

For the second quarter this fiscal, Edelweiss ARC’s gross revenue grew 7.4% year-on-year to Rs 231 crore, while profit after tax soared by 52.25% y-o-y to Rs 70 crore. The company witnessed robust recoveries of around Rs 740 crore from the wholesale portfolio and around Rs 160 crore from the retail portfolio.

Edelweiss Financial Services’ stake in the ARC is currently 60%, while CDPQ Private Equity Asia, part of Canada’s pension fund CDPQ, holds 20%.

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Indian Bank classifies 2 Srei grp a/cs as NPA, BFSI News, ET BFSI

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State-owned Indian Bank has classified two accounts of Srei Group, worth Rs 1,800 crore, as non-performing assets (NPAs) as on the September-ended quarter 2021. Its net profit has grown more than doubled at Rs 1,089 crore in the second quarter, as compared to Rs 412 crore in the same period last year.

Its MD & CEO Shanti Lal Jain said the profit was driven by growth in non-interest income, (other income), which grew by 26% YoY and 8% QoQ. “It stood at Rs 1,966 crore as against Rs 1,558 crore in the second quarter, on account of increase in recovery of bad debts and forex income,” Jain said.

However, the bank’s net interest income declined by 1% YoY and 2% QoQ to Rs 4,084 crore in the September quarter, 2021.

The public sector bank said we have recognized eight accounts as NPA (bad loans) worth Rs 1,900 crore, which are to be given to the National Asset Reconstruction Company (bad bank). He said “We have already made 50% of provisions for those eight accounts.”

Provisions and contingencies allocated to cover bad loans lowered to Rs 2,187 crore in this quarter, as against Rs 2,530 crore for the corresponding period last year, and Rs 2,234 crore sequentially.

Gross NPA ratio stood at 9.56% in September 2021, marginally lower from 9.89% in September, 2020. The net NPA ratio stood at 3.26%, higher from 2.96% in the same period.

The bank’s fresh slippages declined to Rs 3,952 crore compared to Rs 4,204 crore in the June quarter. Fresh slippage was high due to Corporate loans and crop loans.



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NARCL may get first bad loans tranche of Rs 90,000 crore by January, BFSI News, ET BFSI

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The National Asset Reconstruction Company (NARCL), or bad bank, is likely to get the first tranche of bad assets worth about Rs 90,000 crore by January 2022, according to a report. In the first phase, fully-provisioned toxic assets will be transferred.

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. A bad bank refers to a financial institution that takes over bad assets of lenders and undertakes resolution.

Last month, the Cabinet had approved a proposal to offer sovereign guarantee on the security receipts (SRs) issued by the NARCL, It is estimated to cost the govenrment Rs 30,600 crore over five years.

Recovery hopes

The bad bank hopes to recover between Rs 50,000 crore and Rs 64,000 crore through the resolution of bad loans amounting to Rs 2 lakh crore.

NARCL may get first bad loans tranche of Rs 90,000 crore by January

The lowest recovery is seen at 25 per cent or Rs 50,000 crore, while the highest recovery rate is pegged at 32 per cent, or Rs 64,000 crore. The most likely recovery has been pegged at 28 per cent or Rs 56,000 crore.

The NARCL will buy the assets around Rs 36,000 crore or, about 18 per cent of the book value of Rs 2 lakh crore assets. About 15 per cent of Rs 36,000 crore would be paid by NARCL to banks in cash and the remaining 85 per cent via security receipts guaranteed by the Centre.

Close to liquidation

Though banks have made 100% provision for these assets, Rajkiran Rai, MD & CEO of Union Bank of India, does not expect more than 20-25 per cent recovery from these legacy accounts, he told a television channel.

The State Bank of India has identified NPAs with Rs 17,000-18,000 crore outstanding to be transferred to the NARCL, while Punjab National Bank has identified Rs 8,000 crore worth of NPAs, Union Bank of India Rs 7,800 crore of NPAs to be transferred to the National ARC. The Bank of India has identified about Rs 5,500 crores of assets for transfer while Indian Bank about Rs 1,900 crore.

Assets

NARCL may get first bad loans tranche of Rs 90,000 crore by January

Banks have identified Rs 82,496 crores worth of bad loans that could be transferred to the NARCL, which has names like Videocon’s VOVL (Rs 22,532 crores total exposure), Reliance Naval and Engineering Ltd (Rs 8,934 crore), Amtek Auto (Rs 9,014 crore), Jaypee Infratech (Rs 7,950 crore, Castex Technologies (Rs 6,337 crore), GTL Ltd (Rs 4,866 crore), Visa Steel (Rs 3,394 crore), Wind World India Ltd (Rs 3,161 crore), Lavasa Corporation (Rs 1,424 crore), Consolidated Construction Consortium Ltd (Rs 1,353 crores).

Several assets such as Videocon have seen realisable value close to liquidation value in NCLT proceedings. Many big-ticket resolutions at IBC have seen haircuts over 90%. With most of the NPAs proposed to be transferred to the bad bank being old legacy NPAs, there has been an erosion in value, making them more likely to head to liquidation.

Lavasa Corporation has got bids worth Rs 700 crore for loan claims of over Rs 8,000 crore at NCLT.



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NARCL expects up to 32%, or Rs 64,000 crore, recovery from the first bad loan tranche, BFSI News, ET BFSI

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The National Asset Reconstruction Company (NARCL), or bad bank, hopes to between Rs 50,000 crore and Rs 64,000 crore through the resolution of bad loans amounting to Rs 2 lakh crore, according to a report.

The lowest recovery is seen at 25 per cent or Rs 50,000 crore while the highest recovery rate is pegged at 32 per cent, or Rs 64,000 crore. The most likely recovery has been pegged at 28 per cent or Rs 56,000 crore.

The NARCL will buy the assets around Rs 36,000 crore or, about 18 per cent of the book value of Rs 2 lakh crore assets. About 15 per cent of Rs 36,000 crore would be paid by NARCL to banks in cash and the remaining 85 per via security receipts guaranteed by the Centre.

Close to liquidation

Though banks have made 100% provision for these assets, even Rajkiran Rai, Chairman of Indian Banks Association, and MD & CEO of Union Bank of India does not expect more than 20-25 per cent recovery from these legacy accounts, he told a television channel.

The State Bank of India has identified NPAs with Rs 17,000-18,000 crore outstanding to be transferred to the NARCL while Punjab National Bank has identified Rs 8,000 crore worth of NPAs, Union Bank of India Rs 7,800 crore of NPAs to be transferred to the National ARC. The Bank of India has identified about Rs 5,500 crores of assets for transfer while Indian Bank about Rs 1,900 crore.

The assets

Banks have identified Rs 82,496 crores worth of bad loans that could be transferred to the NARCL, which names like Videocon’s VOVL (Rs 22,532 crores total exposure), Reliance Naval and Engineering Ltd (Rs 8,934 crore), Amtek Auto (Rs 9,014 crore), Jaypee Infratech (Rs 7,950 crore, Castex Technologies (Rs 6,337 crore), GTL Ltd (Rs 4,866 crore), Visa Steel (Rs 3,394 crore), Wind World India Ltd (Rs 3,161 crore), Lavasa Corporation (Rs 1,424 crore), Consolidated Construction Consortium Ltd (Rs 1,353 crores), among others.

Several assets such as Videocon have seen realisable value close to liquidation value in NCLT proceedings. Many big-ticket resolutions at IBC have seen haircuts over 90%. With most of the NPAs proposed to be transferred to the bad bank being old legacy NPAs, there has been an erosion in value, making them more likely to head to liquidation.

Lavasa Corporation has got bids worth Rs 700 crore for loan claims of over Rs 8,000 crore at NCLT.



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Several NPAs transferred to bad bank may head to liquidation, cost govt a bomb, BFSI News, ET BFSI

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The government has announced the setting up of National Asset Reconstruction Company Ltd with much fanfare and committed over Rs 30,000 crore guarantee for bad assets acquired by it, but it may be used up soon, going by the initial assets going by the list of assets proposed to be transferred to the bad bank.

Banks have identified Rs 82,496 crores worth of bad loans that could be transferred to the NARCL, which includes the following companies.

COMPANIES TOTAL BAD LOANS
Videocon Rs 22,532 crore
Reliance Naval & Engineering Rs 8,934 crore
Amtex Auto Rs 9,014 crore
Jaypee Infratech Rs 7, 950 crore
Castex Technologies Rs 6,337 crore
GTL Ltd Rs 4,866 crore
Visa Steel Rs 3,394 crore
Wind World India Ltd Rs 3,161 crore
Lavasa Corporation Rs 1,424 crore
Consolidated Construction Consortium Ltd Rs 1,353 crore

Also read: NARCL will empower lenders, but recovery from 26 accounts is not easy, industry says
Several assets such as Videocon have seen realisable value close to liquidation value in National Company Law Tribunal proceedings. Many big-ticket resolutions at Insolvency and Bankruptcy Code have seen haircuts over 90%. With most of the NPAs proposed to be transferred to the bad bank being old legacy ones, there has been an erosion in value, making them more likely to head to liquidation.

Lavasa Corporation has got bids worth Rs 700 crore for loan claims of over Rs 8,000 crore at NCLT.

Several NPAs transferred to bad bank may head to liquidation, cost govt a bomb

Close to liquidation

Though banks have made 100% provision for these assets, even Rajkiran Rai, chairman of Indian Banks Association, and MD & CEO of Union Bank of India does not expect more than 20-25 per cent recovery from these legacy accounts, he told a television channel.

The State Bank of India has identified NPAs with Rs 17,000-18,000 crore outstanding to be transferred to the NARCL, while Punjab National Bank has identified Rs 8,000 crore worth of NPAs, Union Bank of India Rs 7,800 crore of NPAs to be transferred to the National ARC. The Bank of India has identified about Rs 5,500 crores of assets for transfer while Indian Bank about Rs 1,900 crore.

“I am not hopeful. Because these are bad assets. Finally, all these will go under liquidation,” Siby Antony, chairman of the ARC Association of India.

The bad bank

Finance Minister Nirmala Sitharaman announced a Rs 30,600 crore government guarantee for the National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets, paving the way for operationalisation of the bad bank.

Also read: Finance Minister Sitharaman announces bad bank, Cabinet approves backing of up to Rs 30,600 crore

The finance minister in Budget 2021-22 announced the setting up of a bad bank as part of the resolution of bad loans worth about Rs 2 lakh crore.

The bad bank or 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 (SRs). The government guarantee would be invoked if there is a loss against the threshold value.

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

This sovereign guarantee would be for a period of five years and NARCL would have to pay a fee for this.

“The SRs are getting the backstop through government funding only in as much as to pay the gap between the realised value (resolution/liquidation) and the face value of SRs and this will hold good for five years,” Sitharaman said.

The fee for the guarantee would be initially 0.25 per cent, which would progressively increase to 0.5 per cent in case of delay in resolution of bad loans.

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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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Bad bank’s Security Receipts to get Govt backing

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The much awaited ‘bad bank’ — National Asset Reconstruction Company Ltd — moved a step closer to going live with the Union Cabinet approving a crucial proposal that requires the government to guarantee the security receipts (SR) issued by NARCL, when buying NPAs from banks.

To begin with, the government may earmark ₹31,000 crore for the guarantees, sources said. This is a contingent liability as of now and unlikely to impact the fisc in the short-term, they added.

Regulatory forbearance has reduced immediate capital requirements for Banks: Fitch

The Cabinet decision comes on the heels of NARCL getting incorporated in Mumbai last month and the Indian Banks Association (IBA) moving the Reserve Bank of India for a licence to set up ₹6,000-crore bad bank.

NARCL — sponsored primarily by Canara Bank (likely to take a 12 per cent equity stake) and have equity participation by other nationalised banks — will buy the bad loans from banks and issue SRs for up to 85 per cent and cash for the remaining, in line with standard industry practice.

Indian bankers in talks as court rulings threaten over $6 billion in loans

Already, PSBs have identified 22 stressed assets (consortium loans of over ₹500 crore) totalling ₹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.

What is a bad bank?

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

One of the big advantages of having an NARCL will be that it will avoid delays in decision making on recoveries as most lending had hitherto involved the consortium approach and required approval by multiple lenders before recovery could happen, said a former chief executive of a PSB.

Budget proposal

Finance Minister Nirmala Sitharaman had in this year’s Budget proposed the setting up of an ARC along with an Asset Management Company (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 turn around the stressed assets for eventual recovery. She had, however, not indicated that the government would guarantee the SR issued by NARCL.

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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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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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