By Nitin Jain
In Feb 2021, RBI announced a structure for a proposed negative bank, “What you call a bad bank is not really that; an ARC-type entity will be set up to take over bad loans from the books of public sector banks and it will try to resolve just like any other ARC,” RBI Governor Shatikanta Das had mentioned.
Proposed Structure of Bad Bank
Though no formal structure has been announced but, we fully grasp basis news reports, that a National Asset Reconstruction Company Limited (NARCL) is going to be set up to take more than NPAs from banks. The Promoters are probably to be energy finance firms although the PSU banks will hold the remaining equity stake in the ARC. As per current news reports, state-owned banks have shortlisted 28 loan accounts to be transferred to the NARCL with a total of Rs 82,500 crore of loans due, and additional loans could also be transferred such that the AUM is more than Rs 2 lakh crore. The list of borrowers contains massive names such as Videocon Oil Ventures Limited (VOVL), Amtek Auto, Reliance Naval, Jaypee Infratech, Castex Technologies, GTL, Visa Steel, Wind World, Lavasa Corporation, Ruchi Worldwide, Consolidated Construction.
Normally the NPA loans at the time of takeover by an ARC are valued about 30-40% of the principal quantity. However, as we fully grasp from news sources, in the case of NARCL the loans may perhaps be acquired at the present book worth. The NARCL would spend 15% in money and the balance 85% in safety receipts or any other proportion as they may perhaps make a decision. Further, the government would provide a assure to the safety receipts issued by the negative bank. Let’s assume that a bank sells a loan of Rs one hundred to NARCL. Now, if the Bank has currently made 75% provisions for the loan, then the book worth of this loan is Rs 25, and 15% of Rs 25 i.e. Rs 3.75 is money to be paid to banks. Thus, employing these assumptions, for taking more than say Rs 2 lakh crore of negative loans, a money outflow of Rs 7,500 crores and issuance of SRs worth Rs 42,500 crore may perhaps be necessary. (Please note that these assumptions have been taken for the goal of explaining this notion only and are not indicative or confirmatory in any nature).
Pros and Cons of the Proposed Bad Bank Structure
Pros | Cons |
|
|
However, a Bad Bank, or even a network of negative banks, will not make the losses disappear. The losses, or non-performing loans, transferred to a negative bank will nonetheless exist. The course of action may perhaps permit superior recovery of these loans in future. It will be crucial for the banks to assessment their lending policies and place in spot a robust danger management technique. Further, it would be essential to see how NARCL will handle these negative assets. I think that one will call for specialized knowledge for recovery of these negative assets such as:
-Taking manage of management of these firms from the Promoters. The RBI had demonstrated efficient management of DHFL, by taking more than the board and appointing an administrator to handle the corporation and uncover a resolution.
-Interim Crisis Management in these Companies – restructuring, decreasing charges, identifying surplus assets and to sell these assets to create liquidity, and supplying transparent and clear communications to all stakeholders.
-Classification of negative loans by sector. The Government currently has considerable knowledge in the Road/ Highways and Power Sector through its Undertakings. However, knowledge may perhaps want to be constructed in other sectors through sector specialists to facilitate day-to-day management of the operations of the corporation and to uncover a viable resolution to preserve worth.
-Provisioning policies of NARCL will want to be reviewed such that they are in accordance with the tenor/ maturity of the SRs issued.
-NARCL will want to take a selection as to the route to be taken for recovery from the negative loan. Some prospective routes could be:
-
- Initiating corporate insolvency course of action on the Company
- Engaging an investment banker to pursue mergers and acquisitions transaction for the mentioned asset.
- Undertake a compromise or settlement u/s 230 of Companies Act.
Though the ‘Bad Bank’ seems to be a sweet pill for the banking sector to get rid of their quick difficulties, it would be a hard activity ahead for the proposed NARCL to preserve the tax- payers’ monies more than the medium and longer term.
(Nitin Jain is a veteran corporate and investment banker possessing worked in banks like Standard Chartered Bank and Bank of America. He is a Restructuring Expert and is also an Insolvency Professional registered with IBBI. The views expressed in the above post are the author’s individual views.)