The establishment of the bad bank will be led by state-owned lenders, but the sick asset resolution platform will need the help of private banks and other lenders to succeed. If all lenders sign up, the National Asset Reconstruction Company (NARC), which was revealed in the budget, will be able to pool 100% of a sick company’s unpaid loans, resulting in a better resolution of asset quality stress for everyone.
“The government has yet to reveal the details of the NARC or the bad bank and has only stated that it is willing to provide some kind of sovereign guarantee to assist the platform. This can’t only be for public-sector banks if it’s to succeed, and play a leading role in this, but NARC will be all-encompassing, as we understand it at this moment. PSBs, private sector banks, and in general any financial institution with exposure to the specified account would be included”, said Swaminathan, State Bank of India Managing Director.
The current collection of over two dozen ARCs has been unable to reach adequate debt aggregation numbers and is trapped below 40%, which affects the final resolution. Since the ARC (bad bank) is mandated and backed by the government, it would be a much smoother process in terms of all the banks agreeing to move the entire asset. This means that the aggregation will be close to 100 percent, and there will be an AMC structure. As a result, we anticipate that this will be a winning recipe.
The bad bank is very close to being a reality, and the dual structure of becoming both, an asset restoration and asset management firm would be beneficial. At this time, financial sector stakeholders are being contacted to gauge their interest, and once the potential shareholders are in place, one of the companies will take the lead. The lead bank or financier would own more than 100% of the company and apply to the RBI for a license to operate as an ARC, stressing that the bad bank will not have a problem with financing or resources.
The bad bank will use the prevalent structure, in which only 15% of the funds will be paid in cash and the remainder in security receipts, with this model ensuring that the fund’s initial funding requirements are low. Inside the country’s largest lender, a committee is working out a slew of modalities including possible assets that can be moved to the NARC, capital requirements, and so on. One of the unsolved issues that will be resolved in the future is how to value the government assurance that will accompany the protection receipts.
“NARC would give the banks a fixed price for an asset and wait for approval from the joint lender’s forum before proceeding with a resolution. After the sum has been quoted, the lenders will contact other ARCs in the scheme, and NARC would have the opportunity to revise its offer as well indicating that price discovery is possible. Before the asset is passed to NARC a plurality of lenders must agree, with the concept of majority likely to be the one used by the Insolvency and Bankruptcy Code”, added Swaminathan.
