Tag: national asset reconstruction company

Bad bank: Govt guarantee seen costing Rs 30,600 crore

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Of the 101 non-performing assets (NPAs) initially reviewed, banks have zeroed in on 22 accounts amounting to roughly Rs 89,000 crore for transfer to NARCL in the first phase.

The Indian Banks’ Association (IBA) has estimated that the government may have to fork out not more than Rs 30,600 crore if it offers guarantee on the security receipts (SRs) issued by the National Asset Reconstruction Company (NARCL) while acquiring bad loans from lenders, a top banker told FE.

“The prospects of recovery from some of the bad loans look promising. So, government guarantee on SRs, subject to its approval, may not cost more than this amount. Details are being worked out by the IBA, and NARCL will be operationalised soon,” he said.

Although the government backed the setting up of NARCL, it wouldn’t infuse capital into it; instead, participating banks would put in the equity. Nevertheless, bankers expect the government to give guarantee on the SRs, which will make the resolution process more viable and attractive.

Earlier, financial services secretary Debasish Panda had said banks would have the option to transfer several large stressed assets (of at least Rs 500 crore each) worth Rs 2.25 lakh crore to NARCL initially.

The IBA, which is spearheading efforts to establish NARCL, has zeroed in on five consultants to expedite the process. It has sought quotations from SBI Capital Markets and Oliver Wyman for advisory services; from E&Y for tax consultations; AZB & Partners for legal consultations; and AON Consulting for HR services.

NARCL is expected to acquire stressed assets at net book value by offering 15% of it upfront (in cash), and the rest (85%) in SRs. Once the bad loan is resolved, realisation for the relevant bank would be in sync with its SR interest in that asset.

The IBA is also working out an “exit strategy” for those accounts that remain unresolved even after five years, said the banker.

Of the 101 non-performing assets (NPAs) initially reviewed, banks have zeroed in on 22 accounts amounting to roughly Rs 89,000 crore for transfer to NARCL in the first phase.

Already, the IBA has formed a core committee headed by its chairman (Union Bank of India managing director Rajkiran Rai) for setting up NARCL and the Indian Asset Management Company. The committee also comprises IBA chief executive Sunil Mehta, State Bank of India MD J Swaminathan, IDBI Bank MD and CEO Rakesh Sharma and ICICI Bank executive director Sandeep Batra.

The proposed asset management company, comprising professionals, will be set up within the broader NARCL structure that will work out the toxic assets and take appropriate decisions, including on selling them off to investors.

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

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NEW DELHI: State-owned Canara Bank on Tuesday said it will be the lead sponsor of National Asset Reconstruction Company Limited (NARCL) or bad bank with 12 per cent stake in the entity.

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

“The Indian Banks’ Association (IBA), vide their letter dated May 13, 2021 requested Canara Bank to participate in NARCL as sponsor. The board of Canara Bank has given in-principle approval for taking stake in NARCL,” Canara Bank said in a regulatory filing.

Following the board nod, it said, the bank has sought the approval from the Reserve Bank of India for participating in NARCL as sponsor contributing 12 per cent stake.

Various public sector banks (PSBs) have also announced that they have earmarked a signification portion of their NPAs to be transferred to NARCL.

For example, Punjab National Bank (PNB) said that it has identified non-performing assets of Rs 8,000 crore to be transferred to NARCL.

The proposed NARCL would be 51 per cent promoted by PSBs and remaining by private sector lender.

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

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.

“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 IBA had made a proposal for 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.

The IBA was appointed nodal agency to constitute the Asset Reconstruction and Asset Management Companies designated as NARCL and India Debt Management Company Ltd (IDMCL) respectively.



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First phase: Rs 89k-crore loans to be moved to NARCL

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The government’s plan, as outlined in the Union budget for 21-22, is to create an ARC and an AMC to take over and resolve bad loans.

By Ankur Mishra

Lenders have identified 22 stressed accounts, worth around Rs 89,000 crore, to be transferred to the proposed National Asset Reconstruction Company (NARCL) in the first phase. A much larger exposure — of an estimated Rs 2 lakh crore — is expected to be transferred over time.

The chairman of Indian Banks’ Association (IBA), Rajkiran Rai G, said banks have identified accounts which can go to the ARC in the first phase and have arrived at this number. “However, once the ARC is formed, the management will look at these assets and only if they find that it is worthwhile, they will make an offer,” Rai said.

Rai, who is also MD and CEO of Union Bank of India, said of the total amount, Union Bank had identified Rs 7,800-crore bad loans will be sent to NARCL. The lender will also pick up a 9% stake in the asset reconstruction company. Similarly, Punjab National Bank (PNB) MD and CEO SS Mallikarjun Rao on Saturday had said the lender had identified Rs 8,000-crore NPAs to be sent to NARCL.

“What we have done is a preliminary work to keep the ground ready so that when the ARC is registered, it can take off quickly,” Rai said. The accounts identified are those where the provision coverage is nearly 100% and the exposure is more than Rs 500 crore. The government’s plan, as outlined in the Union budget for 21-22, is to create an ARC and an AMC to take over and resolve bad loans.

Rai said the Indian Banks’ Association (IBA) has asked lead banks to call for meetings and keep an approval ready so that as soon as the ARC is formed, they can start the process. Care Ratings had earlier said that that once the transfer of Rs 2 lakh crore was complete, the revised gross bad loan ratio could be around the same levels prior to the asset quality review exercise conducted by the Reserve Bank of India (RBI) in 2015.

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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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IBA CEO, BFSI News, ET BFSI

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National Asset Reconstruction Company Ltd (NARCL), the name coined for the bad bank announced in the Budget 2021-22, is expected to be operational in June.

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, Indian Banks’ Association Chief Executive Officer (CEO) Sunil Mehta said.

“Various preparatory work is going on and we hope that it should be operational next month. The biggest advantage of NARCL would be aggregation of identified NPAs (non-performing assets).

“This is expected to be more efficient in recovery as it will step into the shoes of multiple lenders who currently have different compulsions when it comes to resolving a bad loan,” he said.

NARCL will take over identified bad loans of lenders, Mehta said. He added that the lead bank with offer in hand of NARCL will go for a ‘Swiss Challenge’, where other asset reconstruction players will be invited to better the offer made by a chosen bidder for finding higher valuation of an NPA on sale.

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

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.

“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, IBA had made a proposal for 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.

Mehta further said 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 loss against the threshold value, he added.

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 on March 2020.

To facilitate 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 development of this sector and to facilitate 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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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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