A leading asset reconstruction company (ARC) in India has suggested the Reserve Bank of India (RBI) to make available the targeted long-term repo operations (TLTRO) money via banks to bad loan resolution companies for resolving the likely spurt in stressed loans on account of business disruption post the COVID-19 lockdown.
The RBI had recently opened the TLTRO window of Rs 1 lakh crore with three years tenor to banks. This money was specifically given to banks to deploy it in the primary and secondary bond papers and also specifically to NBFCs and MFIs.
Faced with a one-year suspension of bankruptcy code, the banks are now knocking on the doors of ARCs. There are currently over two dozen ARCs with the biggest being Edelweiss ARC and ARCIL.
The banking system, which already has 9 per cent gross NPAs, now faces the danger of more loans slipping into NPAs. There are already some Rs 40 lakh crore of term loans under the RBI's six-month moratorium. A part of these loans, especially the corporate loan, would certainly slip into stress given the likely shrinkage in the economy with little hope of any major recovery next year.
The bankers are hoping for a return of the restructuring schemes. The banks are asking for a one-time debt restructuring from the RBI. Currently, any restructuring of loans by banks attracts the NPA provisioning norms.
With the bad loan situation in flux, the ARCs are pouncing on the current opportunity to initiate discussions with banks. While ARCs have limited capital, there is a good opportunity to acquire quality assets at a bargain price.
So far, the ARCs' record in finding a resolution to bad loans has not been very encouraging.
As per the RBI data till June 2019, the ARCs have acquired bad assets from banks with book value of Rs 3.8 lakh crore. The ARCs, which get a hefty discount on the book value, pay a part in cash and the balance via security receipts (SRs), which is an investment for a selling bank.
Currently, the security receipts issued by the bank is to the tune of Rs 1.46 lakh crore. The ARCs have redeemed only Rs 12,906 crore for banks so far. The outstanding SRs in the books of banks are still at Rs 1.14 lakh crore.