Banks are waiting to hear from the Reserve Bank of India (RBI) on the revised structure for the bad bank proposed by the Indian Banks’ Association (IBA). According to three bankers in the know, the industry has offered to structure a principal-agent relationship between the National Asset Reconstruction Company (NARCL) and the India Debt Resolution Company (IDRCL) and the central bank’s nod is expected any day now.
The reason for planning a new structure is the RBI’s objection to approving the dual-entity structure of the bad bank. The original plan put forward by the government involved the setting up of an ARC, which would aggregate non-performing assets (NPAs) worth Rs 500 crore or more and an asset management company (AMC), which would work to resolve the bad assets for a fee.
While the RBI issued a licence to the ARC — NARCL in this case — it expressed its reservations about the plan to transfer assets to the AMC, a banker said. ARCs are a category of non-banking financial companies (NBFCs) regulated by the RBI, but AMCs are regulated by the Securities and Exchange Board of India (Sebi).
A principal-agent relationship is an arrangement under which an entity legally appoints another entity to act on its behalf. If such a structure is implemented with the NARCL as the principal and the IDRCL as an agent, it will give the RBI control over the latter.
“What has been proposed now is a principal-agent relationship where the asset resolution will be outsourced to the IDRCL. So far we haven’t heard from the RBI,” a senior executive with a mid-sized private bank said.
Another banker said a solution on the matter could be reached by the end of this month. “We are working on this project on a regular basis and every day there is some development. We are hoping that by month-end there will be a final resolution of the matter,” he said.
The original plan of a bad bank, comprising an ARC and an AMC, was announced as part of the Union Budget for FY22 on February 1, 2021.