India’s bad bank has received all requisite regulatory approvals and lenders plan to transfer at least ₹50,000 crore of toxic assets by 31 March, SBI chairman Dinesh Khara said on Friday.
While the plan to form a bad bank and clean up bank balance sheets was announced in the Union Budget last year, the delay was on account of the Reserve Bank of India’s (RBI) unhappiness over the proposed structure. Lenders had to then tweak the form in which the bad bank would operate and present a revised proposal to the regulator.
Under the structure approved by the regulator, the National Asset Reconstruction Company Ltd (NARCL) will acquire and aggregate the identified bad loan accounts from banks, while India Debt Resolution Company Ltd (IDRCL) will handle the debt resolution process under an exclusive arrangement.
A total of 38 accounts of ₹82,845 crore have been identified for transfer to the (NARCL).
“The transfer will happen in the phased manner and in phase one, about 15 accounts aggregating to ₹50,000 crore are expected to be transferred to the NARCL. We are trying to have these accounts transferred within this financial year after completing all the required processes,” said Khara.
Banks had earlier said that ₹2 trillion worth of stressed loan accounts could be transferred. However, a few of these have already been resolved in the last year and ₹82,845 crore worth of accounts are those where the joint lenders’ fora (JLFs) have met and decided to transfer them.
J Swaminathan, managing director, State Bank of India said that for the remaining accounts, processes are still on in a phased manner and will happen over the next year. “The universe of ₹2 trillion was identified on the basis of the ₹500 crore and above the cut-off for the banking system being in the stressed assets book. So, this book will be dealt with over a period of time either till it is resolved with the lenders or it gets transferred to NARCL,” said Swaminathan.
IDRCL is expected to bring in superior resolution techniques, preserve value and showcase the brownfield assets and attract domestic, foreign investors and alternative investment funds (AIFs).
“This will maximize value for all stakeholders. It is also expected to free the bandwidth as well as capital for the lending bankers, which can be put to more gainful use,” said Khara.
Seen as the panacea for all of India’s bad loan menace, NARCL was set up on 7 July with an authorized capital of ₹100 crore and has been classified as a “Union government company”. The setting up of the bad bank is part of the government’s efforts to clean up India’s financial system, which is sitting on one of the biggest piles of bad assets in the world. Transferring soured loans to NARCL will allow banks to cut their losses and renew lending.
NARCL will try to identify and acquire assets on a 15:85 cash and security receipt (SR) basis. These SRs will be issued in favour of the transferring lenders and will be secured by a government of India guarantee for its face value.
“While public sector banks have taken a majority stake in NARCL, IDRCL will be majorly owned by the private sector banks. This unique public-private partnership is envisaged to get the best of the talent in terms of ability to handle the large exposures and have the benefit of aggregation and also domain expertise will come handy to resolve stressed assets,” added Khara.
Once the bad loans are transferred to NARCL, a trust will be set up for each loan account and the debt resolution will be handled by IDRCL which will not carry any balance sheet.
“The balance sheet will be with the NARCL, the licensed asset reconstruction company (ARC). The trust will reside there, SRs get issued from the respective trusts and for each account, the resolution mandate will be with the IDRCL,” said Swaminathan.
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