WITH JUST three days left for the 2022-23 Union Budget, a proposal by Finance Minister Nirmala Sitharaman on February 1 last year to create a “bad bank” has been approved.
State Bank of India chairman Dinesh Khara said on Friday that the proposed “bad bank” had “now” received all necessary clearances, including from the Reserve Bank of India. It is ready to start operations with 15 cases worth Rs 50,335 crore to be transferred by March 31, he said.
Khara said public sector banks will hold majority stake in National Asset Reconstruction Company Limited (NARCL) while private banks will hold majority stake in India Debt Resolution Company Limited (IDRCL).
Sitharaman had in his February 1, 2021 budget speech proposed a new structure for the resolution of stressed assets. “The high level of provisioning by public sector banks of their troubled assets calls for measures to clean up the banking books. An asset reconstruction company and asset management company would be created to consolidate and take over existing distressed debt, then manage and sell the assets to alternative investment funds and other potential investors for eventual realizing value,” she said.
SBI’s Khara said some concerns were raised, but NARCL and IDRCL eventually got the required approval. NARCL will acquire and consolidate identified non-performing asset (NPA) accounts from banks while IDRCL will manage the debt resolution process, he said.
Asked why there has been back and forth over the structure of the wrong bank with the RBI, Khara said, “I think there is no difference between the original construction and what finally came to light. This is a structure that was first considered, and regardless of how long it took, it’s basically ironing out some of the issues that may have arisen in the future. So they’ve all been ironed out and they’ve been dealt with appropriately. And so, that the operation of the two entities is fluid and that they are able to achieve the objective for which they were created.
Concerns have mainly focused on the dual ownership structure and operational mechanism with the creation of two separate entities NARCL and IDRCL.
NARCL will acquire and consolidate the identified NPA accounts with banks while IDRCL, under an exclusive agreement, will manage the debt resolution process. This exclusive arrangement will be within the scope defined in the “debt management agreement” to be signed between the two entities, Khara said.
Free up bank capital
Proposed during the first term of the NDA government, the bad bank was finally approved. The new structure should free up the balance sheet and help banks lend to productive sectors.
“This arrangement will be on a ‘principal-agent’ basis and final approvals and ownership of the resolution will rest with NARCL as principal. This is in line with the structure originally envisaged,” he said.
Normally, a single entity responsible as owner and responsible for asset recovery is in practice. The Indian Banks Association (IBA) would have liked to have the dual structure with AMC as a private entity, out of reach of regulatory entities. But now a “Principal and Agent Mechanism” has been put in place to address regulatory concerns, in which final approvals will be made by NARCL as Principal.
The resolution of the assets will be done gradually. While a total of 38 accounts totaling Rs 82,845 crore have been identified to be transferred to NARCL, this will be done in a phased manner. In the first phase, at least 15 accounts worth Rs 50,335 crore will be transferred to the proposed bad bank by March 31.
Initially, an estimated Rs 2 lakh crore worth of unrecoverable assets was to be transferred to the ‘bad bank’. However, Khara said some of those accounts have already been resolved.
J Swaminathan, managing director of the distressed asset management group at SBI, said: “We will make a decision on whether more assets should be transferred to NARCL, or whether they can be resolved by the banks themselves. same by next year.”
Regarding the operational structure, Khara said that NARCL will purchase these bad debts through a 15:85 structure, where it will pay 15% of the sale consideration in cash and issue security receipts (SR) for the remaining 85%. The SRs will be guaranteed by the government, Khara said.
“This unique public-private partnership will bring the benefit of aggregation, expertise to resolve stressed assets. I expect faster resolution of assets in the banking sector with the establishment of the bad bank “, did he declare.
In a press release, SBI said IDRCL is expected to bring superior resolution techniques, preserve value, enhance brownfield assets, and attract domestic and foreign investors, alternative investment funds, etc. This will free up capital for other bank loans, he mentioned.
Padmakumar Nair, Chief Managing Director of SBI’s Stressed Assets Vertical, will lead NARCL while Manish Makharia, Head of Alternative Investment Fund, SBI Funds Management Pvt Ltd will lead IDRCL. Subrata Biswas, the administrator appointed to the NARCL board, will be the interim president and Diwakar Gupta will continue as the president of the IDRCL.