The National Asset Reconstruction Co., dubbed as India's bad bank, has run into more difficulties. According to three people in the know, the Reserve Bank of India has raised concerns about the structure which the asset reconstruction company is seeking to follow for resolution of stressed assets.
The regulator's main concerns are around the India Debt Resolution Co., a private sector entity created to help the bad bank with resolution. The two-tier structure would have ensured that the NARCL could buy bad loans from banks and aggregate the debt under it, while the IDRCL would act as a resolution agent for the ARC.
The RBI has expressed its unease regarding the lack of any regulatory oversight in IDRCL's case, the people quoted above said. If a borrower whose company is undergoing resolution has any complaints against IDRCL, is there an agency they can approach, asked the first of the three people quoted above.
According to the second of the three people quoted above, the regulator is also uncomfortable with IDRCL brokering deals with foreign funds to buyout stressed assets from NARCL. The RBI is of the view that the process of reconstruction and resolution should be the main focus area for an ARC, and not stressed assets trading, this person said.
"The primary issue is that in India we have focused a lot on sale of assets as resolution, rather than actually fixing the underlying business. This has led to incomplete reforms, which eventually lead to low levels of success," said Ashvin Parekh, managing partner, Ashivn Parekh Advisory Services.
Moreover, India lacks a transparent market for trading of bad loans and an instrument which can be used by investors, Parekh said.
"The policymakers must see whether they are covering all aspects of resolution, before a concrete plan is set to motion," he said.
With the RBI expressing its objections, the process of resolution of stressed assets through the bad bank mechanism may see further delays.
Queries mailed to the RBI and the Indian Banks' Association were not responded to.
The government had first announced setting up the NARCL and IDRCL back in February 2021. It was expected to pick up stressed assets worth Rs 2 lakh crore from banks and resolve them within five years.
However, since the idea was formed, there has been a general lack of consistency in the execution, the first person quoted above said.
In about a year of existence, the NARCL has already seen three changes in chairman. Sunil Mehta, chief executive at IBA, was the first chairman who stepped down in December 2021, to make way for finance industry veteran Pradip Shah. However, Shah resigned by April and former MD and CEO of Indian Overseas Bank, Karnam Sekar was appointed as non-executive chairman in May.
Padmakumar Nair, who was first appointed as MD and CEO of NARCL in May 2021, too, stepped down last month and former State Bank of India Deputy Managing Director Natarajan Sundar took over.
According to the first person quoted above, repeated changes in top leadership affect decision-making and continuity of vision, which NARCL has faced.
When the IDRCL was conceptualised last year, it was to be a privately owned resolution firm, which would have complete operational freedom.
However, the RBI at the time had declined to approve such a structure, since the IDRCL is not a licensed resolution company and therefore cannot invoke any powers under laws such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.
To counter this, banks assured the RBI that the IDRCL would work as an agent of NARCL, where all resolution related decisions would be taken by the ARC. However, with the banking regulator now further objecting to the structure, bankers fear that IDRCL will be limited to advising the NARCL board, the third person quoted above said.
Expect Delays
In January, while addressing reporters, SBI Chairman Dinesh Kumar Khara had said the first phase of bad loan sales worth Rs 50,000 crore to NARCL would be concluded by March 31. However, that process has gotten delayed due to the various leadership changes.
The current deadline for the sale is set at June 30, the first person quoted above said. Work at NARCL is going on in full swing, where the process of due diligence of the bad loans is being concluded. Once that is done, NARCL will submit a binding bid for these assets, following which, banks will have to conduct a Swiss Challenge auction. Under this, private ARCs will be allowed to outbid NARCL and the bad bank will reserve the right to either match the new bid, or let go of the asset.
However, this deadline too seems unlikely to be met, considering the RBI's latest objections. Even if banks manage to close the asset sale, the resolution process itself will start slowly, as NARCL will need to appoint specific managers for these assets. It is not clear what role IDRCL can play in this process either, the second person quoted above said.
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