For exposures worth Rs 100 crore and more—where the borrower is a defaulter and the resolution plan is being worked on by the lenders—banks should assess the possibility of a sale or an auction to ARCs
While it is possible the rules were stacked against them, and the operating framework was not really helpful, it is certainly true, ARCs (Asset Reconstruction Companies) have not done as well as one would have wished. The strategy in that market has been to typically to acquire bad loans where there were underlying assets and then try and make a recovery by selling those assets. ARCs, of course, earned a management fee from the banks for managing these assets. But, in all these years, the results have been below par; we have seen little evidence of actual resolution or turnaround of companies.
Nonetheless, going by the recommendations of the panel tasked by Reserve Bank of India (RBI) to come up with suggestions to re-invigorate the ARC ecosystem, it would appear that the operating framework does suffer some frailties. But even before that, the problem is exacerbated by the fact that banks tend to delay the sale of stressed assets to a point where much of the value is destroyed so that it is neither possible to revive the business nor get a good price for it. While that is clearly inefficient on their part, the system needed to have been designed to address this. The panel’s suggestion that lenders be incentivised to sell bad loans early by allowing them to amortise the loss, on the sale, over two years sounds reasonable.
For exposures worth Rs 100 crore and more—where the borrower is a defaulter and the resolution plan is being worked on by the lenders—banks should assess the possibility of a sale or an auction to ARCs. It is somewhat surprising this was not being done. The committee has now suggested that where the NPAs are older than two years, and no resolution plan is being pursued nor the bad assets put on the sale list, banks must put on record the reason for their exclusion. This is important, banks must be made more accountable. If ARCs have not lived up to expectations, it is partly because banks too have shied away from selling to them or selling too late.
The other problem has been the consortium arrangement; too many lenders have made it difficult to aggregate the debt. The panel suggests that if 66% of the lenders (by value) decide to accept an offer, the rest would need to agree and that the transaction should be closed out within 60 days of it being approved. Should any lender fail to fall in line, it would need to provide fully for the exposure. The NARCL should not suffer from disaggregation; ensuring this will take care of the problem of enforcing the security backing each of the assets, the quality of which can often vary across lenders.
The online transactions platform, mooted by the panel, can could give the stressed loan markets the boost it needs; it would certainly be a transparent process. It is also a good idea to have a couple of external valuers do a valuation exercise to come up with both the liquidation value and fair market values; this would help fix the reserve price which, in turn, would help better price discovery at the auctions. A high-level committee would sign off on the reserve price allowing for impartiality. To be sure, all processes have their failings, but the objective is to make it as foolproof as possible. The fact is we need a deep stressed-loans market so that capital is not blocked, and we need banks to participate.