The unfortunate truth is that the track record of existing ARCs in India leaves much to be desired.
Now that the National Asset Reconstruction Company (NARCL) is armed with a Rs 36,600 crore government guarantee for Security Receipts (SR) that it will issue, it must get down to the brass tacks. It is not enough the assets—some Rs 90,000 crore in the first round—are transferred and the banks pocket 15% of the determined value in cash and a promise from the government for the rest in five years. It is critical the assets, or at least a big part of these, are resolved. This will depend to a great extent upon the quality of management and execution at the NARCL and its associate asset manager, the India Debt Resolution Company (IDRCL).
The unfortunate truth is that the track record of existing ARCs in India leaves much to be desired. The strategy in that market has been, typically, to acquire bad loans with 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.
To be sure, the NARCL is better positioned to effect recoveries because it enjoys one great advantage in that it will enable the aggregation of the exposures of every bank to each of the non-performing assets (NPAs). This immediately takes care of the problem of enforcing the security backing each of the assets, the quality of which often varied across lenders.
With this advantage and the heft of a government guarantee backing its securities, the NARCL has little excuse to go the way of its predecessors. It should be able to set an example in terms of coming up with a proper resolution for most of these assets. In many ways, this is a test case for India’s debt resolution market, and NARCL must prove equal to the task. While prevention is always better than cure, and bankers must learn to lend sensibly, things can always go wrong for no fault of lenders. However, a vibrant debt resolution market will make bankers less risk-averse and improve the lending environment. The sooner the NARCL and the IDRCL get their act together, the better; the fact is the stressed asset cycle hasn’t come to an end even if banks have almost stopped lending to the corporate sector.
It is not going to be easy. Most of the assets being transferred could not be resolved via the corporate insolvency resolution process (CIRP) of the IBC. They have been festering on the books of banks—most of them from the public sector—for nearly five years now. How, one might ask, are they now going to find takers? After all, the resolution via the insolvency process has often attracted bids close to the liquidation value possibly because the bidders are never sure about the extent of the downside. Buyers need to be convinced they are getting their money’s worth. And it is up to the management—of the NARCL and IDRCL—to get the assets back in shape so acquirers will bite.