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View: Will NARCL succeed in addressing bad loans issue?

View: Will NARCL succeed in addressing bad loans issue?

View: Will NARCL succeed in addressing bad loans issue?
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By S. Murlidharan  Sept 17, 2021 5:13:37 PM IST (Published)

The idea of bad bank to tame NPA monster is exciting if it has unique expertise in making reluctant borrowers pay up. Otherwise it would go down as desperate and failed last resort

The government seems to be possessed by a sudden burst of reformist zeal. Walking the talk on one of her key announcements in the Budget 2021, Finance Minister Nirmala Sitharaman has announced formation of India’s first-ever “Bad Bank”. She said the “National Asset Reconstruction Company Limited” (NARCL) has already been incorporated under the Companies Act. It will acquire stressed assets worth about Rs 2 lakh crore from various commercial banks in different phases. Another entity — India Debt Resolution Company Ltd (IDRCL), which has also been set up — will then try to sell the stressed assets in the market.

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The NARCL-IDRCL combine then is the new bad bank which will work in tandem. The government stands in readiness with Rs 30,600 crore to be used as a guarantee war-chest should there be a shortfall between market realisations and outstandings.
It is not as if this is our first dalliance with bad bank though admittedly NARCL-IDRCL is the first major government initiative ever since SARFAESI Act, 2002 cleared the decks for creation of Asset Reconstruction Companies (ARCs), euphemism for bad banks. Call in bad bank or ARC, the purpose is to bring about a system for recovering Non Performing Assets (NPAs) by their transfer from the books of secured lenders to ARCs books and unlocking the value of NPA. But then in the nearly two decades though there has been mushrooming growth of ARCs—Asset Reconstruction Company (India) Ltd (ARCIL), ASREC (India) Ltd, Pegasus Assets Reconstruction Private Ltd and Alchemist Asset Reconstruction Company Ltd to name a few—but have nothing substantial to show by way of results.
Malaysia has a modicum of success to show with its government owned Danaharta incorporated in 1998 recovering as much as 58 percent of the NPA taken over whereas in Ireland its 51 percent government owned NAMA incorporated in 2009 recovering just 33 percent. In the ultimate analysis, the chances of high recovery are no different from the traditional mode of recovery by the lender himself except that bad banks claim expertise and specialisation in the art of recovery thus freeing the commercial banks the tedium, burden of pursuing them unproductively and instead focusing on lending. The NARCL will first purchase bad loans from banks. It will pay 15 percent of the agreed price in cash and the remaining 85 percent will be in the form of “Security Receipts”. When the assets are sold with the help of IDRCL, the commercial banks will be paid back the rest.
The devil as they say is in details. The bad bank doesn’t have a magic wand to recover the remaining 85 percent especially given the corona and lockdown ravaged status of the Indian economy and the notorious Indian tendency to parry off the lenders unless whip is cracked. The bad bank has no whip to crack. Unlike Insolvency and Bankruptcy Code (IBC) which empowered the NCLT to remove the defaulting promoter from the saddle by auctioning the controlling interest to the highest bidder, bad bank would be largely toothless except that its supposedly savvy experts know where, when and how to exert pressure.
There are a number of imponderables too. It is not as if the security receipts are going to be lapped up eagerly and voraciously. The SEBI as it is allows only private placement of SRs of ARCs thus making it thinly traded. In any case given the government guarantee for five years, there would be a first mover rush to cash in on the guarantee to make up for the shortfall in realizations of the full amount due from the sale of SRs Rs 30,600 crore are too small an amount vis-a-vis the staggering size of our NPA. It would be stretching credibility to say that our NPA demon would be tamed with a small quick-fix costing just Rs 30,600 crore. All hell will break loose once this small war-chest is exhausted.
It is also calls for a huge leap of faith to believe that the release of 15 percent of the NPA by the bad bank would release the sluice gates of fresh loans. While there could be an incremental increase in loans there is also a corresponding if not proportionate threat of further surge in NPA. Truth be told while we are experimenting with measures to tame the NPA monster, till date we haven’t put in place foolproof recovery mechanism. Prevention after all is better than cure.
The SARFAESI Act, 2002 aka Securitization Act in fact has another USP apart from making available the services of ARCs—75 percent of lenders in terms of value can seize the assets mortgaged with the help of the district magistrate sans court orders in case of default. But the threat of seizure and sale have been used more to rattle MSMEs and other small borrowers rather than to shake big ticket defaulters from their smugness. The bottom line of course is the Securitization Act has failed to deliver. The much-touted IBC has flattered to deceive—its name-shame-dislodge ammunition not deterring our thick-skinned defaulters who secretly relish the insolvent tag and wear it on their sleeves.
Bad bank seems to be the government’s last hope. Perhaps the government would do well to arm it with coercive powers like seizure under SARFAESI. Otherwise it would be reduced to the passive role of pushing the security receipts to the finicky and cherry-picking qualified institutional buyers.
—S. Murlidharan is a CA by qualification and writes on economic issues, fiscal and commercial laws. The views expressed in the article are his own
Read his other columns here
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