PremiumBansal said the list of assets set to be transferred to NARCL still has bad loans already being resolved under the Insolvency and Bankruptcy Code (IBC), although fewer than what was initially proposed
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MUMBAI : Private asset reconstruction companies are unlikely to show much interest in the auction of bad loans to state-backed National Asset Reconstruction Co. Ltd (NARCL) as the scales are tipped sharply in favour of the so-called bad bank, said R.K. Bansal, chief executive of Edelweiss ARC.
Regulatory norms require banks to use the Swiss Challenge method for auctioning bad loans of ₹100 crore and above. Under the method, lenders will publicly call for counter bids to match the initial offer by NARCL. If they do not get an improved offer, NARCL’s bid is chosen. However, if counter bids exceed the initial bid, NARCL has the option to match the improved offer. “The only catch here is that it is not a level-playing field since NARCL would buy in the 15:85 structure while, as I understand, other ARCs would have to offer 100% cash," Bansal said, referring to the payment terms for NARCL, which will have to pay 15% of the total bid in upfront cash and the rest as security receipts guaranteed by the government.
Banks plan to sell ₹50,000 crore of stressed loans to NARCL, the newly formed bad bank, by 31 March to clean up their books.
“If I have to invest only 15% (in cash), then it is a different game, and I would expect the yield on only the 15% part. If I have to invest 100% (in cash), we naturally expect the yield on the entire amount. We cannot compete with that part because our security receipts are not guaranteed by the government," said Bansal.
Bansal said the list of assets set to be transferred to NARCL still has bad loans already being resolved under the Insolvency and Bankruptcy Code (IBC), although fewer than what was initially proposed. That said, he does not expect the bad bank to crowd out existing ARCs since most of them might not even be interested in these cases.
“Banks expect a certain price, and that type of price may not be forthcoming from other ARCs. Maybe there are some good value cases, and if the reserve price is low, there would be interest. It would depend on the specific case, although I do not find much interest in the present list," he said.
That said, Bansal pointed out that the primary advantage of the NARCL sale process is that it would lead to aggregation of bad debt, allowing quicker decision-making by the buyer during the resolution process.
The plan to form a bad bank to clean up banks’ balance sheets was announced in the Union budget last year. But the Reserve Bank of India’s unhappiness with the proposed structure delayed the plan. Lenders then presented a revised proposal to the banking regulator. A total of 38 accounts worth ₹82,845 crore have been identified for transfer to the NARCL.
RBI recently threw its weight behind the bad bank plan. Citing references from other nations with bad banks, RBI said that if the logistical and financial challenges are carefully navigated, experiments of such bad banks can have more hits than misses.
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