|Tamal Bandyopadhyay / 02 23, 2021|
For bankers, the headache of recovering the debt now stuck will be less. The budget states that asset restructuring company (ARC) and asset management company (AMC) will be set up to make up for the huge debt of banks. These companies will settle and manage stranded debts and sell them to alternative investment funds and other investors.
Why are we allowing banks to own bad banks when 28 ARCs already exist? Apart from this, Yes Bank will start a new ARC after regulatory approval. In fact, except for some ARCs with strong investors, the rest do not have the capital to buy such loans. The Lending Act was lagging behind in the recovery of stuck debts due to several reasons. Under this law, the National Company Law Tribunal (NCLT) will deal with the loan default of at least one lakh rupees. In March 2020, its limit was increased to Rs 1 crore so that small and medium enterprises are kept out of the insolvency process during the Kovid-19 epidemic.
In June 2020, when the government announced a six-month concession for filing new cases under the Kovid era, there were about 11,000 cases pending before the NCLT. This period was extended to 25 March 2021. The approval of NCLT usually takes from a fortnight to a month after the case is filed. The case has to be settled in 180 days but an additional period of 90 days may be found for it. It depends on the complexity of the case. This time limit of 270 days does not cover the time spent on the suit, which is often more. The Act was amended in August 2019 so that action can be completed within 330 days of the acceptance of the case but in practice it takes longer. The bidder may place a new bid and the new bidder may also join. The law was changed so that new bids could not be made after a deadline. But it can be increased for better bidding. Liability defaulters can also go to the Appeals Association, the High Court and the Supreme Court. In this process the value of many assets is destroyed. In the NCLT driven process, most of the assets lose their value. It is believed that Bad Bank will solve this problem.
Initially, a total of Rs 2.25 lakh crore of capital will be transferred to ARC with stranded debt of Rs 500 crore or more. In the absence of a bid, any pricing for the stuck debt will be difficult. This is why selective legal changes will be required in ARC manufacturing. An amount of Rs 50,000 crore to Rs 75,000 crore will be transferred from banks to ARC at book value. Banks will be offered 15 percent cash and 85 percent security. These securities are securities of banks. The debt that is sold to ARC will be transferred from the bank’s books to the investment category. These receipts will be redeemed once the recovery is complete. At the time the loan is transferred, if the value is more than that, it will be handed over to the banks as they will be owned by ARC. Banks will get lesser amount on less recovery.
If a thermal power project or road project or airport fails to repay the loan then it may need some amount of money which will be received from AMC. Along with the banking sector, the real economy will also benefit. Also, if ARC can attract alternative investment funds as buyers then the market of receivables will be created and the reform process will be accelerated.
AMC does not require a lot of capital but ARC does. Without it, how will she buy the trapped debt? It will require Rs 11,250 crore to buy a loan of Rs 75,000 crore. Where will this amount come from? Will the banks help? Also, as is being said, how would this transaction be absolute cash?
The sale of stranded debt will accelerate because there is a formula of net worth and there will not be any hindrance in how much the banks will be willing to charge in order to sell the trapped debt. Apart from this, many questions have to be found. For example, will the existing ARC now focus only on small loans ie loans below Rs 500 crore?
Will there be any automatic termination provision in Bad Bank? RBI gives eight years for disposal of an acquired asset. This is then to be written by both the seller bank and ARC. But with the approval of the receiving holder, the recovery effort can continue. Should this time limit change? The question is also, in whose hands will the command be in the hands of retired government bankers and bureaucrats?
While Bad Bank will help in the disposal of stuck debt, the Development Finance Institute (DFI) for financing the basic sector will act as a catalyst for the financial needs of the projects in the long term. But where will the money come from for lending? In the late 1990s, the old DFIs had to be shut down as the government stopped getting cheap funds. This led to discrepancy in their assets and liabilities.
Talking about the media report, according to finance ministry officials, India Infrastructure Finance Company Limited (IIFCL) will be merged into the proposed DFI. The government infused Rs 5,300 crore for recapitalization after investing Rs 500 crore in May, raising IIFCL’s capital to around Rs 10,000 crore. Now, with an additional capital of Rs 10,000 crore, a total capital of Rs 20,000 crore will remain in it.
The plan is to be the first to clear IIFCL’s debt of Rs 4,500 crore. This is a rescue plan for IIFCL which has sanctioned Rs 95,176 crore and disbursed Rs 43,313 crore for 510 projects in 15 years by December 2020. The proposed DFI plans to provide a loan of Rs 5 lakh crore in the next three years. This does not seem appropriate. If it is run by accountable professionals, where will the money come from? The question is whether there is a plan to create a loan-raising institution through the new DFI?
(The author is Business Editor’s Advisor Editor, Author and Senior Consultant of Jan Small Finance Bank)