Tag: stressed assets

Experts believe prepacks will expedite insolvency resolution as govt readies move, BFSI News, ET BFSI

Banking & Finance

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The government is finalising a pre-packaged insolvency resolution process in anticipation of the rise in bankruptcies due to the pandemic.

According to reports, the government is likely to start with micro, small and medium enterprises as it sees a rise in bad loan cases with the lifting of suspension on insolvency proceedings against Covid-related defaults last month.

“Govt is working with regulators to bring out pre-pack and other resolutions of MSME and other sectors. A lot of work in progress has been already achieved, it is only when some part of implementation issues has been watched closely, so once the whole mechanism is in the market, it is well accepted by the market, Pawan Kumar, Deputy MD, IIFCL, said.

As bad loans are feared to top 13.5% of total advances due to the pandemic such a move has become urgent, experts said.

Under the pre-packaged process, main stakeholders like creditors, shareholders and the existing management or promoter can come together to identify a prospective buyer and negotiate terms of a resolution plan, before submitting it to NCLT for formal approval.

In the Budget for 2021-22, Finance Minister Nirmala Sitharaman said the government will introduce alternative methods of debt resolution and a special framework for micro, small and medium enterprises.

What experts say

Experts say it will help expedite the resolution process for stressed assets as well as reduce the number of insolvency-related cases before the National Company Law Tribunal (NCLT).

“It’s time for the prepack. Prepack is the way to go if you want to preserve the asset (value). If you want to create a very effective remedy outside NCLT…,” Nishant Singh, Partner at Indus Law, said.

Pre-pack has to be at the forefront and also with some other mechanism on the forefront of the resolution of the insolvency and bankruptcy cases, said Ashok Haldia, Chairman, Governing Board Indian Institute of Insolvency Professional of ICAI.

“IBC has been the main law for the resolution of insolvency. Any forward-looking economy, any forward-looking industry or business scenario would see IBC is a matter of last resort, rather than the first legislator or framework to address there has to be an alternative mechanism rather than what we have been discussing all along be pre-pack as an alternative mechanism,” he said.

Lack of buyers

Nishant Singh of Indus Law said that the availability of resolution buyers could be a challenge in today’s stressed market situation, emphasising that the government needs to further encourage foreign players in view of their participation.

“Right now they (foreign players) have limited access through ARC (Asset Reconstruction Company) or FPI (Foreign portfolio investment) to actually participate…We have a massive debt which is under default or going to be the default and foreign investors are not able to participate (much), we are blocking massive liquidity coming into the Indian market which can really help to resolve these assets,” Singh said.

NCLT Infrastructure

Another challenge for the resolution under the IBC framework could be the lack of infrastructure, Singh said. Already, India is witnessing a pile of litigation cases at its courts, he said, adding “The courts will need to figure out how they will increase the capacity in the stipulated amount of time.”

“There has to be a process to make sure when there is a flood of these cases then we should prioritise the admission process so that the corporate debtor who needs immediate protection, gets that protection and the process gets jump-started,” he said.



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Raghuram Rajan’s formula has led to over 50% recovery for ARCs, BFSI News, ET BFSI

Banking & Finance

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The recovery rate of asset reconstruction companies (ARCs) has been over 50% in the last five years since Raghuram Rajan brought in the ’15:85 structure’ for acquiring non-performing assets from banks.

“From FY16 onwards, recovery has been more than 50% in ARCs, which is much much better than even an IBC. In IBC resolution everyone talks of resolved cases, but 75% cases of IBC are going into liquidation, recovering less than 10 % of loans” says Siby Antony, chairman, ARC Association of India.

In FY2015 Raghuram Rajan brought in the 15:85 structure, under which the cash component ARCs would have to pay to a bank was raised to 15% while the rest was security receipts, from the earlier 5:95 split.

The 5:95 split

“The 5:95 (5% cash and rest SR) split was a very skewed structure in favour of ARCs. It was a blind game ARCs could play,” says Antony.

Under 5:95 structure, ARCs could earn a positive net return just on the basis of management fees, without any value addition by securitisation or asset reconstruction.

The increase of cash proportion to 15% pushed the ARCs to raise their returns through securitisation and asset reconstruction.

The 15:85 structure

“15:85 is an excellent structure. Unless the ARC recovers 130% of the acquisition value, it will not make its return. Even at 100%, ARC will make loss because the management fee of 1-2% doesn’t make any ARR for ARC. Recovery should be over 130% so that 100% of security rights will be redeemed,” Antony said.

Provisioning killed the goose

However, in September 2016, the Reserve Bank of India introduced new regulatory guidelines regarding provisioning. From April 2018 banks have to sell at 90% cash and 10% SRs. If a bank holds more than 10% SR, it had to continue provisioning for the loan which is not even on their books.

“So there was no incentive for them to transfer to ARCs. Now no banks transfer on 15:85 and all deals are on cash,” says Antony.

Cash deals

At such high levels of cash, the market becomes unviable for all but a few. Some ARCs such as Edelweiss, JM Financial that have raised money from Alternative Investment Funds (AIFs) do transactions on a cash basis, but other ARCs have deployed whatever capital they had, and now have none.

The holdings of such AIFs which have the capital to invest in newly-issued security receipts have risen sharply. These funds hunt for viable assets. Vulture funds and AIFs look for 25% plus returns while the ARCs look at 18-20%



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RBI Guv, BFSI News, ET BFSI

Banking & Finance

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The proposed asset reconstruction company (ARC) for management of non-performing assets (NPAs) announced in Budget 2021 will not ‘jeopardise’ the activities of existing players in the space, Reserve Bank Governor Shaktikanta Das said on Thursday. While presenting the Union Budget 2021, Finance Minister Nirmala Sitharaman proposed to set up an asset reconstruction company and asset management company to consolidate and take over existing stressed debts and manage them.

“(In) no way will it (proposed ARC) jeopardise the activities of the existing ARCs. I think there is scope to have one more strong ARC…,” the governor said at an event organised by the Bombay Chamber of Commerce.

There are close to 28 asset reconstruction companies operating in the country at present.

Das said the proposal for setting up an ARC was given by public sector lenders to the government, which accepted it and announced it in the Budget.

The proposed entity will take over stressed assets from the books of public sector banks, and try to resolve them like any other ARCs are doing, he noted.

Das also said strengthening of regulatory architecture for existing ARCs is very much on the central bank’s agenda.

“Refining and further upgrading the regulatory architecture in respect of ARCs to ensure that they have a skin in the game and they are very much in business, is one aspect which is receiving a lot of attention from us,” he said, adding last year he had interacted with a group of ARCs but COVID-19 slowed progress on that front.

Speaking about stressed assets, the governor said there is growing awareness and realisation among banks in dealing with NPAs.

Even during the period when the Supreme Court ordered an asset classification standstill, banks proactively provisioned for stressed assets, he said.

The governor said RBI has also sharpened and deepened its supervisory methods and is now going to deep dive into areas of banking that were unexplored earlier.

With the help of the Central Repository of Information on Large Credits (CRILC) data coming in from banks on a regular basis, RBI has an idea on the quantum of stressed assets in various default buckets, he said.

“We have a precise idea of the build up of stressed assets in banks and as soon as we see a sign of stress, we immediately enter into a discussion with banks and proactively deal with the problems,” he emphasised.

The governor said apart from RBI’s supervisory and regulatory initiatives, the key to all issues is improving the governance in both public and private sector banks.

One area which requires focus of the bank management is on improving their credit appraisal skills and taking measures to see whether evergreening of loans, which was happening at some point, is suitable or not, Das said.

He also said the country’s financial sector currently is in a much better place than it was earlier. HV ABM ABM



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Ind-Ra, BFSI News, ET BFSI

Banking & Finance

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India Ratings and Research (Ind-Ra) has revised its outlook on the overall banking sector to stable for FY22 from negative. This is because substantial systemic measures have reduced the system-wide COVID-19 linked stress below the expected levels. Banks have also strengthened their financials by raising capital and building provision buffers.

“Ind-Ra has upgraded its FY21 credit growth estimates to 6.9% from 1.8% and 8.9% in FY22, with the improvement in the economic environment in 2HFY21 and the government focus on higher spending especially on infrastructure. We estimate GNPA at 8.8% in FY21 (FY22: 10.1%) and stressed assets at 10.9% (11.7%). Provisioning cost has fallen from its earlier estimate of 2.3% for FY21 to 2.1%” said the agency in its report.

Key Findings

Private Sector Banks

  • The regulatory changes led to an improvement in public sector banks’ (PSBs) ability to raise AT I capital, a high provision cover on legacy NPAs, overall systemic support resulting in lower-than-expected COVID-19 stress.
  • Private Banks continue to gain market share both in assets and liabilities, while competing intensely with PSBs. Most have strengthened their capital buffers and proactively managed their portfolio.

Stressed Assets

  • Ind-Ra estimates that about 1.24% of the total bank book is under incremental proforma NPA and about 1.75% of the total book could be restructured by end-FY21.
  • Ind-Ra estimates that overall stressed assets (GNPA + restructured) could increase 30% for the banking system, the increase is almost 1.7x in the retail segment in 2HFY21.
  • The stock of stressed retail assets for PSBs could increase to 2.9% in FY22 from 2.1% in FY21, while it could increase from 1.2% to 4.3% for Pvt Banks.
  • Ind-Ra has assessed that stressed corporate assets as a percentage of gross bank credit declined to 15.3% at end-1HFY21 from 15.7% at end-FY20 (FY19: 17.2%, 1HFY19: 19.3%, FY18: 20.2%).

Provision Coverage Ratio

  • Excluding COVID-19 linked stress, Ind-Ra expects the provision coverage ratio (excluding technical write-offs) for both PSBs and Pvt Banks to reach 75%-80% by end-FY21.
  • The resultant provision cover is expected to be about 70% at end-FY21 and FY22, while the historic slippage rate will continue.
  • PSBs have 0.2%-0.5% provisions while Pvt Banks have 1%-2% covid provisions, most of which is unutilised.

The report further mentioned, “Under the Emergency Credit Line Guarantee Scheme, the GoI provided a guarantee to banks and NBFCs for extending funds to stressed MSMEs. Based on the progress seen till 25 January 2021, the funds sanctioned by banks under the scheme has totalled to INR1.98 trillion.” While Pvt Banks have been more adept at underwriting risk in the segment, they also have a higher share of unsecured retail assets where the borrowers have faced a disproportionate impact on their ability to service loans.

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RBI approves Piramal resolution plan for DHFL

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Surabhi

The Reserve Bank of India is understood to have approved the resolution plan for Dewan Housing Finance Corporation Ltd submitted by Piramal Group.

“We understand that the RBI has approved the DHFL resolution plan from Piramal Capital and Housing Finance, submitted by the Committee of Creditors,” said Piramal Enterprises Ltd in a statement on Thursday.

The lenders are likely to take the proposal to the National Company Law Tribunal by next week for approval.

Piramal Capital and Housing Finance Ltd had emerged as the successful bidder for debt-laden DHFL in January this year after multiple rounds of bidding.

In the voting by the CoC, Piramal had garnered 94 per cent of the votes, while Oaktree Capital received 45 per cent of votes.

The troubled housing finance company was the first financial services firm to be taken to NCLT in late 2019, and its resolution has been closely watched.

The claims of lenders that have been admitted in NCLT in the case of DHFL aggregate to about ₹81,000 crore.

The total consideration for DHFL was ₹34,250 crore, which includes an upfront cash component of ₹14,700 crore and a deferred component of ₹19,550 crore, PEL had said in its third quarter results, adding that the acquisition is in line with its strategy to diversify its loan book and increase granularity.

“We are changing our financial services business model from one that is wholesale-led to a well-diversified one; this also being one of the key objectives behind our bidding for DHFL,” Ajay Piramal, Chairman, PEL, had said in the third quarter results.

According to the resolution plan, Piramal will merge its existing financial services business with DHFL. The merged entity is expected to focus largely on the retail real estate and lending space.

For the quarter ended December 31, 2020, DHFL posted a consolidated net loss of ₹13,095.38 crore in the third quarter of the fiscal year against a net profit of ₹934.31 crore in the same period a year ago.

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NBFCs’ stressed assets could touch ₹1.5-1.8-lakh cr by fiscal end: Crisil Ratings

Banking & Finance

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Stressed assets of non-banking financial companies (NBFCs) are likely to touch ₹1.5-lakh crore to ₹1.8-lakh crore by the end of the current fiscal, according to a report by Crisil.

This would amount to about 6per cent to 7.5 per cent of their assets under management (AUM), it said.

Also read: InvITs, REITs can raise ₹8-lakh crore capital in the medium term: Crisil

However, the one-time Covid-19 restructuring window, and the micro, small and medium enterprises (MSMEs) restructuring scheme by the Reserve Bank of India (RBI) will limit the reported gross non-performing assets (GNPA), it said in a statement on Tuesday.

“Alongside wholesale loans (dominated by real estate and structured credit), vehicle finance, MSME finance and unsecured loans have been in the spotlight this year due to a rise in stressed assets,” it said. The impact is likely to be transitory for vehicle finance.

“The big challenge this year will be the unsecured personal loans segment, where underlying stress has increased significantly with early-bucket delinquencies more than doubling for many NBFCs. This segment had last seen such pressure in 2008-10, after the global financial crisis,” it further said.

Unsecured loans to MSMEs is another area where underlying borrower cash flows have been affected, Crisil also highlighted. “However, despite the potential asset-quality stress, reported metrics may stay benign on the back of high write-offs,” it said.

Stressed assets in real estate finance could touch 15 per cent to 20 per cent of AUM by March this year, the agency said. In the category of unsecured loans (including personal loans and consumer durables), stressed assets could amount to 9.5 per cent to 10 per cent of AUM, while in vehicle finance it could be at a similar 9 per cent to 10 per cent of AUM. Stressed assets in lending to the MSME segment could reach 7.5 per cent to 8 per cent of AUM by March this year, Crisil projected.

Krishnan Sitaraman, Senior Director, Crisil Ratings, said, “Collection efficiencies, after deteriorating sharply, have now improved, but are still not at pre-pandemic levels. There is a marked increase in overdues across certain segments and players.”

Also read: Securitisation volume improves in Q3 on revival in economy: Crisil

Gold loans and home loans should stay resilient, with the least impact among segments, he however, said.

Rahul Malik, Associate Director, Crisil Ratings, said how NBFCs approach restructuring will differ by asset class and segment. “While the traditional ones such as home loans have seen sub-1 per cent restructuring, for unsecured loans it is substantially higher at 6 per cent to 8 per cent on average, and for vehicle loans 3 per cent to 5 per cent,” he said.

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Veena Sivaramakrishnan, BFSI News, ET BFSI

Personal Finance

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The resolution framework for stressed assets has been in the works for sometime from the time of Project Sashakt itself and the AMC-ARC structure has been attractive leading to competition because there is now an expectation that there will be competition in this market so the price discovery would get better because NPAs don’t have a mechanism by which they’re traded.

Veena said, “AIFs coming into fray would allow other players to also enter into this market which is not permitted directly and certainly the first step in the right direction.”

On the framework, she says, “ARC purchases bad debt and looks at recovering directly from the borrower and is fairly limited. With an AMC coming into picture means there’s a specialist in the frame who can provide the know-how on actual resolution and outside IBC.”

An expert AMC will play a role in restructuring an account and therefore arrive at a resolution.

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SBI, PNB, other Indian banks see sharp fall in NPAs; these reasons to thank for improved asset quality

Banking & Finance

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SBI alone had recoveries to the tune of Rs 4,038 crores and has written off loans worth Rs 5,617 crores.

India’s largest PSU banks — State bank of India (SBI) and Punjab national bank (PNB) — saw a significant fall in non-performing assets in the fiscal’s second quarter. SBI, which accounts for the highest share of PSU Banks’ GNPAs at 20 per cent, reported the highest asset quality improvement in the second quarter. Its GNPA ratio fell to 5.3 per cent in September 2020, compared to 7.2 per cent in the same month last year. Another large PSU bank, PNB that accounts for 16 per cent share in overall PSU banks’ GNPAs, saw a fall in NPAs at 13.4 per cent in September 2020, compared to 16.8 per cent in the last year. 

The improvement in asset quality has majorly been due to recoveries and higher write-offs by the multiple banks. SBI alone had recoveries to the tune of Rs 4,038 crores and has written off loans worth Rs 5,617 crores, according to Care Ratings. Among other PSU banks, NPAs of Bank of India fell from 16.31 per cent to 13.79 per cent on year in Q2; Bank of Maharashtra (16.86 per cent to 8.81 per cent); Indian Overseas Bank (20 per cent to 13.04 per cent); and NPAs fof UCO Bank fell from 21.87 per cent to 11.62 per cent on-year in Q2.

The net NPAs of all banks also shrank significantly to Rs 2.1 lakh crores in Q2 FY21 from Rs 4.5 lakh crores in Q2 FY19, reflecting an increase in provision coverage ratio (PCR). The aggregate provision coverage ratio of all banks rose to 80 per cent at the end of Q2, from 68.9 per cent in the previous year. The GNPA ratio of scheduled commercial banks further improved to 7.7 per cent in the quarter ended September 2020, against 9.3 per cent in the year-ago period, and 8.2 per cent in the current fiscal’s first quarter, which was largely driven by PSU banks. 

The aggregate interest income recorded a marginal increase of 0.8 per cent during Q2 due to subdued credit offtake, coupled with falling interest rates. Additionally, the falling deposit interest rate in the quarter also led to a decline in interest expense of banks by 8 per cent, compared with 9.4 per cent growth in the year-ago period.

It is to be noted that the Supreme Court has ordered all banks to not classify Covid-19 related defaults as NPAs until further notice, or else the NPAs would have been higher in the second quarter. As per disclosures by banks studied by the rating agency, the Gross NPAs would have been around 0.5 – 0.6 per cent higher if these accounts been classified as NPAs. Meanwhile, IDBI Bank and Lakshmi Vilas Bank had the highest NPA ratios of around 25 per cent in the second quarter.  

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