Bad bank needs good implementation

By: |
October 05, 2021 4:00 AM

The asset resolution platform is of the banks, for the banks and by the banks

nirmala sitharamanThe key to conversion of bad loans to get onto the path of well-turned-around businesses is an efficient and innovative resolution

Is the bad bank a good idea? Absolutely, as long as the good bank with bad assets converts its assets into saleable assets after enhancing value. If the bank itself becomes bad, then it actually becomes a bad bank. Hence, for this discussion, let’s call the combination of the National Asset Reconstruction Company and the India Debt Resolution Company combination as the ‘asset resolution platform’ or ‘the platform’.

The asset resolution platform is of the banks, for the banks and by the banks. It is a creation by the Indian banking system to fund the capital as well as manage the platform. Whilst an ARC (asset reconstruction company) structure has been proposed for the implementation of the platform, the difference is that asset acquisition and trusteeship has been segregated from asset resolution—the former being public-sector-led, supported by a government guarantee, and the latter private-sector-led to give it the flexibility to explore various resolution options.

Implementation is critical as assets are mostly fully provided and have an ageing of 5-6 years of default on an average. Also, banks have spent enough time trying their hand at resolution. The positive is the assets would be resolved on an aggregated basis, which ARCs, if they manage to aggregate a majority, take at least two years to do. Aggregation also enables a single decision-making entity to be better prepared for an asset sale, especially where turnaround and M&A experts are involved.

Further, an ARC structure enables upside sharing with the borrowers and the guarantee would enable aggregation with the platform. However, for smoother function of this platform, the following would be required:

  • The right team and incentive structure to the team, especially at the IDMC, to enable innovation in resolution including pull back of companies from the IBC, infusion of fresh funds (maybe through an AIF that the IDMCL or banks may raise), strict monitoring of turnaround strategies and an efficient system of sale of the underlying assets or the SRs through a transparent process.
  • The right board both at the NARCL and the IDRCL levels to enable the right governance along with granting the requisite flexibility to the management teams. Credibility of the board and the broad experience, either in banking or in operations at a board level, would provide the right guidance to the teams. Also, the board can be the biggest enabler to find the right buyers as we have seen in specific cases.
  • The right processes that should enable a transparent monitoring process and not bind the platform in processes, which would slow down the process. The governance model of coordination between the two entities in the platform needs to be defined and the process should ensure that the handoff between asset acquisition and asset resolution is smooth. There needs to be a defined and coordinated bidding process to ensure that assets are acquired at fair value and the government guarantee is only a backstop, not a resolution option. A preliminary resolution plan should be in place when bidding for an asset.

The key to conversion of bad loans to get onto the path of well-turned-around businesses is an efficient and innovative resolution. Each asset is unique and hence strategies would be asset-specific, which an appropriate team with the right processes and a good governance structure would achieve. The government would need to remain keenly involved to make sure timely course-corrections are enabled.

The author is leader, Financial Services, EY India

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