Skip to main content

Cracking 'bad bank' tough nut, but it's not impossible, say experts

Cracking 'bad bank' tough nut, but it's not impossible, say experts
The NPA problem and the effect on bank balance sheets has not improved despite the Insolvency and Bankruptcy Code (IBC) processThe idea of a ‘bad (loans) bank’ is back on the table as loans gone sour at Indian banks near Rs 10 trillion.Details are sketchy yet on whether the asset reconstruction company (ARC) in this regard would be owned by the government or have non-state participants. Either way, say experts, this is not going to be an easy task.
In any case, there are precedents in India, albeit much smaller in scale. A direct example can be found in the Stressed Assets Stabilisation Fund (SASF), formed in 2004 by the Government of India, to recover Rs 90 billion bad debt of the erstwhile Industrial Development Bank of India (later converted into IDBI Bank). The government issued bonds against the debt and the balance sheet was cleaned.
For some accounts, the fund did recover a substantial amount. However, it was recently revealed, write-offs (‘haircuts’ in banking jargon) in many cases exceeded 90 per cent. A report given in the Lok Sabha last July showed there were inconsistencies on collecting personal guarantees, and property pledges, that led to poor recovery.
“The committee (which probed) are of the opinion that had the SASF not failed in obtaining details of assets of guarantors, net worth of the borrowers, income tax returns, affidavit of assets filed by the guarantors in the courts/ debt recovery tribunals, besides net worth certificate by a chartered accountant, and liability statements, maximum recovery would have been assured,” went the report.
 Panel to take a call on asset reconstruction company for tackling bad loans
There were important lessons in the episode. To start with, that such an ARC can be formed and, if executed well, would make a difference.It is a matter of comfort for the banks too, as they are not stressed asset resolution experts – their focus is lending.“In such a trust or ARC, all banks can transfer the fair value of the assets. Instead of dealing with all the companies that have built up stress, banks can deal with a single ARC,” said Abizer Diwanji, partner for financial services at consultants EY.
The ARC could be managed by professionals and resolution experts. Even for individual cases, sub-groups of experts can be formed. An example is when the government formed a special resolution group for scam-hit Satyam Computer under the chairmanship of Deepak Parekh.There could be five or more stressed assets funds which come together to float such an entity. Or it could be the government taking the help of experts. For example, such ARCs in South Korea are fully owned by the government.
“Government can be the owner; no issue with that. But, they should let competent and experienced professionals handle the resolution. The government should not be the manager and decision maker. Such a model can be a fantastic success story,” said Diwanji.However, the issue of capital remains. “The problem of infusing large amounts of capital when loans are sold to an ARC does not go away.
The ARC itself will require a large amount of capital. If it has majority private ownership, valuation of loans bought from banks will be a huge issue,” said T T Ram Mohan, professor at the Indian Institute of Management, Ahmedabad.
Then & now
He adds that the idea of a bad bank was debated at length in the past but finally “not considered useful”. In recent times, the idea of floating one was first raised by Reserve Bank deputy governor Viral Acharya. Soon after he took charge in February 2017, he had suggested two different structures – a private asset management company (AMC) and a national one. The latter would specifically look at sectors currently under stress but with long-term economic viability. Just before that, in January 2017, the official Economic Survey had suggested a centralised Public Sector Asset Rehabilitation Agency could be established.
SBI to auction 12 NPA accounts on June 25 to recover dues of over Rs 13 bnLast week, officiating Union finance minister Piyush Goyal met heads of public sector banks (PSBs) on how best to resolve their non-performing asset (NPA) accounts and improve their credit flow. He announced the government’s plan for such a proposal. A committee under Sunil Mehta, non-executive chairman of Punjab National Bank, will look into the proposal to form an ARC/AMC for resolution of the NPA problem.
“We have had ARCs in the past and they have struggled. It is not a new experience but, possibly, we will have better experience this time,” says Ranen Banerjee, partner at consultants PwC India.While the government awaits the Mehta committee recommendations, a ‘bad bank’ should not be thought of a panacea to the NPA problem, experts say.“Even when they move some NPA accounts to the ARC, the PSBs will take a hit. For, the ARC will take over these loans only at a discounted price -- a hit on the PSBs and on the government, the main shareholder,” Banerjee said.
The NPA problem and the effect on bank balance sheets has not improved despite the Insolvency and Bankruptcy Code (IBC) process. This is recovering only 43 per cent or Rs 1.7 trillion of the Rs 4 trillion of dues owed to banks by corporate debtors, according to rating agency ICRA.
The problem is that under the IBC, “there are 15 to 20 voices in the Committee of Creditors, deliberating on the resolution of stressed assets”. Whereas, says Ashutosh Mishra, lead analyst at Reliance Securities, under the ‘bad bank’ or ARC/AMC, there will be one voice. This could mean better outcomes for the bank and for the companies that have defaulted. Further, by clearing some of the NPAs, the banks can “focus more on their core business”, he says.In 2015, the government recapitalised 13 PSBs by a combined Rs 200.9 billion. In October 2017, it announced a further recapitalisation plan of Rs 2.1 trillion, of which Rs 900 billion was disbursed by March 2018.

The Business Standard, New Delhi, 11th May 2018


Popular posts from this blog

SC order on RBI circular: More options for banks to tackle defaulting firms

Lenders also have the option of restructuring the loans Lenders to companies which are under stress could now have three options to deal with them if they default on loans: take a haircut as part of a one-time settlement, restructure the loans for a longer tenure as they did when corporate debt restructuring schemes were allowed, or go to the Insolvency and Bankruptcy Code (IBC) for redress. These changes in the options available to lenders come, according to PE funds and bank lawyers who are involved in the IBC process, in the wake of the Supreme Court on Tuesday setting aside the 12 February RBI circular, which allowed a 180-day window to banks to resolve a company default.But they can still find a resolution. According to a Reserve Bank of India circular, a loan becomes a non-performing asset when banks cannot find a way of recovering their money in 90 days. In short, banks still have a window to resolve the default. Lenders can take a haircut as part of a one -time settlement of du…

April GST collections at new high despite rate rationalisation in December

Goods and services tax (GST) collection touched a record high in April, exceeding Rs 1 trillion for the third time in four months. The mop-up was 10 per cent higher over the previous year. Gross collection for the month was Rs 1.13 trillion, said the finance ministry. Despite the recent rate rationalisation in December, a rise in collection was reported. Of the total collected, the CGST (central GST) contributed Rs 21,163 crore, the SGST (state GST) Rs 28,801 crore, the IGST (integrated GST) Rs 54,733 crore (including Rs 23,289 crore on import) and cess Rs 9,168 crore (including Rs 1,053 crore on import). After settlement of the IGST and the balance IGST in a 50:50 ratio between the Centre and states on a provisional basis, the CGST stood at Rs 47,533 crore and SGST at Rs 50,776 crore. The CGST target in the Union Budget for 2019-20 is Rs 6.1 trillion. “The April collection indicates the tax base is increasing gradually, with GST getting stabilised with measures such as e-way bills and…

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…