This article is about ‘Unrolling India’s Bad Bank‘ which is deemed to be helpful in buying bad loans and helps in asset reconstruction. Introduction National Asset Reconstruction Company Limited, primarily known as ‘Bad Bank’ has been created by the government in the form of an Asset Reconstruction Company which is primarily responsible for picking up non-performing loans in… Read More »

This article is about ‘Unrolling India’s Bad Bank‘ which is deemed to be helpful in buying bad loans and helps in asset reconstruction.

Introduction

National Asset Reconstruction Company Limited, primarily known as ‘Bad Bank’ has been created by the government in the form of an Asset Reconstruction Company which is primarily responsible for picking up non-performing loans in India. Actually, the NARCL will pick up loans above a certain threshold.

After the process of picking up the loans, it has the authority to ultimately sell them off to the prospective buyers or investors who are interested in purchasing bad loans in the distressed market. The majority of the equity of NARCL will be held by the Public Sector Banks.

It is already registered with the Registrar of companies (ROC) and has also been issued a license by the Reserve Bank of India to operate in India. Construing the facts of the quantum, NARCL deems to acquire assets worth more than 2 lakh crore including the assets before National Company Law Tribunal, popularly known as NCLT.

They make an offer of 15 percent cash to the banks that are willing to sell their bad loans to NARCL and construing to the balance of 85 percent, they will be issued security receipts. These security receipts issued by NARCL to the banks will be guaranteed by the government thereby making it an extremely safe sale by the banks and also incentivizing them to sell their bad loans to NARCL which is a specialized outfit.

This particular sale will happen in two phases, phase one will envisage the sale of fully provisioned loans of more than Rs. Eighty thousand crores. The second phase will see the sale of lower provision loans from the information that is publicly available to us.

It appears that much more accounts have already been identified and are actually eligible to be sold off to the National Asset Reconstruction Company Limited. This will encourage the sale and therefore one would see a lot of action as far as the sale of bad loans to the so-called back banks is concerned.

The Need For A Bad Bank

It can be considered to be a great deal when we are resorting to the working and development of NARCL. In most cases, it is pertinent to note the fact as we have observed that existing asset Reconstruction Companies usually pick up the small quantum of loans from banks.

If we consider the large quantum of Non – Performing Assets (which are primarily known as NPAs) that we are still grappling and struggling with, an ardent desire and need were felt that a government-backed bad bank or NARCL is required which will resolve larger NPAs and therefore buy a larger chunk of NPAs directly from the banks.

There is a certainty to construe to the fact that NARCL will also be ensuring that the large NPAs get channeled from the books of banks to a specialized outfit which perhaps is better equipped and benevolent to handle such NPAs more than the banks that do have an in-house internal team.

Although it is true a super-specialized outfit like NARCL would perhaps do more justice to resolving such bad debts. The is a slight difference between the skills to handle such distressed debt and skills required in regular commercial lending and therefore as a result, transferring such bad debts to NARCL will also free up the commercial lending ecosystem forcing or rather enabling the banks to focus more on fresh funding rather than struggling and coping up with bad debts in their books.

This will also help in bringing NPA under a single umbrella of ownership which will also ensure that the resolution plans are not delayed because of the multiplicity of lenders. One more reason to justify the need for NARCL is that of late, one has seen a lot of delays in terms of resolution of assets under the Insolvency and Bankruptcy Code, popularly referred to as IBC, 2016.

Therefore, it was a benevolent and smart move of the government to think it best to try another alternative mechanism other than IBC for ensuring that bad debts are resolved as soon as possible.

Function Of Narcl

NARCL will be assisted by a service company incorporated as India Debt Restructuring Company Limited also called ‘IDRCL’. The prime function of IDRCL will be to superintend the acquired stressed assets and engaged debt resolution professionals and turn on experts for disposal of the NPA which has been acquired.

The stake of IDRCL will be held by both, public sector lenders and private lenders. Both NARCL and IDRCL will work in a synchronized manner. However, NARCL will end up purchasing the bad debts from the banks and on the other hand, IDRCL will engage in management and value addition of such acquired assets which have been purchased.

There is a higher possibility that we also witness in near future the aspect that the lead bankers who are acting on behalf of the consortium engaged in a challenge method post a bid by NARCL in order to maximize the returns to all the bankers or the consortium members.

One of the most important factors which need to be kept in mind is that at last, if NARCL is unable to sell the debt which it has acquired from the banks or sells the debt at a loss, then the banker who has sold the debt and who has the security receipts will have the right to invoke the sovereign guarantee which has been given by the government to back up the security receipts.

Concluding Comments

As resorting to concluding comments, the ‘bad bank‘ must generate the necessary incentives to move forward. According to the author, a bad bank can be initially funded by the government, or the government and the private sector can jointly own one, with the management in the private sector, so that they can offer better expertise, restructuring schemes, and higher prices for stressed assets, among other things.

In the administration of a bad bank, the government’s involvement should be minimal. The private sector’s share ownership will serve to increase price discovery and transparency, while the government’s part ownership will provide a sovereign guarantee.

To summarize, the establishment of an Asset Reconstruction Company (bad bank) may be both a qualitative and quantitative component of the solution. On the one hand, it will allow banks to focus on enhancing their core banking services by clearing their NPA balance sheets and transferring them to a more professional, market-friendly business that specializes in managing poor assets without going through a protracted legal process.


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Updated On 2022-02-09T18:42:47+05:30
Mridul Sinha

Mridul Sinha

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