Govt shouldn’t have to guarantee NARCL SRs

By: |
September 21, 2021 5:15 AM

Banks should ensure they recover as much as possible; else, the purpose of the ARC would be defeated

Also, recovery is a specialised skill and the process would be more efficient if one professional team is on the job.Also, recovery is a specialised skill and the process would be more efficient if one professional team is on the job. (Representative image)

Given the Centre has already done its bit by pumping in Rs 3.4 lakh crore of capital into state-owned banks over FY16-FY21, one is not clear why they now need a sovereign guarantee of Rs 30,600 crore to back the security receipts (SR) that will be issued by the National Asset Reconstruction Company Limited (NARCL). Apparently, this guarantee is intended to cover the shortfall between the amount realised from the underlying assets and the face value of the SRs.

Moreover, the SRs become attractive tradeable instruments in the market if they are backed by a guarantee. For perspective, the problem of non-performing assets (NPAs) was created by the banks in the first place and, therefore, they need to find the solution; the manner in which they keep asking for handouts is unseemly. They need to focus on recovering what they have lost on their own steam instead of leaning on the government. For its part, the government should ask them to stand on their own feet.

While the idea of a bad bank is always a bad one because it creates a moral hazard, as this paper has argued for the last five years, there is the advantage of aggregating the loan exposures. Else, the diverging sell-interests of lenders makes resolution a lengthy and often inconclusive process. Also, recovery is a specialised skill and the process would be more efficient if one professional team is on the job.

The stressed loans that the NARCL will acquire from lenders have all been provided for, if not to the extent of 100%, then to the extent of 90% or perhaps 75%. Much of the capital that enabled this provisioning, at least for the state-owned lenders, has come from the government. To that extent, there will be little or no impact on the balance-sheets of banks when the assets are transferred. In fact, banks will receive 15% of the value of the asset—an average of 18%—as cash which goes straight to the bottom line; the remaining 85% would be in the form of SRs.

But, why exactly do the SRs need to be backed by a guarantee? It is the responsibility of the India Debt Resolution Company Ltd (IDRCL), the operational entity, which will manage the assets and engage with market professionals and turnaround experts, to get a good value for the bad loans. The lenders are the biggest sponsors of the NARCL and the IDRCL; it is their responsibility to ensure the two entities get the job done.

They need to ensure these entities are well-staffed with top-notch professionals and that the fee structure is designed to incentivise speedy recovery. As experts have pointed out, where possible, the businesses should be revived to make them more attractive to prospective buyers.

A point here on the role that Resolution Professionals (RPs) have played in the corporate insolvency resolution process (CIRP) under the IBC: Their performance has been somewhat mixed. The lenders also need to make sure that wilful defaulters and errant borrowers stay far away from the decision-makers at the NARCL and IDRCL. This is a chance for our banks to prove they are capable of working in the common interest.

Having got this undeserved largesse, they must try and recover as much as possible. Simply because they have been given the capital to be able to provide for the bad loan exposures does not mean they stop fighting for recoveries. They have got away with `15-20 lakh crore of NPAs, much of it taxpayer money; they can’t be allowed to lose more.

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