Govt-backed 'Bad Bank' to have separate trusts for each distressed asset

The government-backed National Asset Reconstruction Company (NARCL) for the resolution of bad loans through an asset management company (AMC)  structure is likely to have separate trusts for each non-performing loan (NPA) account bought from the banks.

The memorandum of understanding signed by the eight banks includes the provision of various trusts to be set up for the resolution of distressed assets.

In the private sector asset reconstruction companies (ARCs) framework, the ARC plays the dual role of a trustee as well as of AMC. However, there is a provision of a separate AMC named India Debt Management Company (IDMCL ) under the NARCL, which would exclusively be tasked with the management of distressed assets. "The multiple trusts will come under the NARCL, which would be buying assets directly from the banks," say bankers familiar with the developments.

The bad loan market already has private ARCs, but the resolution track record of these ARCs is not good. The insolvency and bankruptcy code (IBC) is also mired in delays and low realisation, which is a cause of concern for the government. In a government-dominated banking system, the gross NPAs are already over Rs 7 lakh crore. Post pandemic, the stress in the banking system is hidden because of the moratoriums, government guarantees, and one-time loan restructuring.

Also read: Shaping India's Bad Bank

The setting up of another ARC is part of the government's initiative to clean up the banking system so that lenders could focus on lending to needy and productive sectors.The banks have shortlisted close to two dozen NPA accounts with a total loan value of close to Rs 90,000 crore, which would get transferred to NARCL in the first phase.

The NARCL will set up separate trusts for these two dozen accounts and transfer the assets at a price they are bought from the banks, which is generally at a discount to the book value. "The 85: 15 structure of security receipts (SRs), which would be the consideration for bad loans, will be applicable for each trust. The NARCL  will then try to attract the investors for SRs," say bankers.

Also read: SC rejects plea seeking clarification on declaration of loan accounts as NPA

The investors could buy as many SRs as they could buy from the trust managing that particular asset. There is likely to be a partial government guarantee for the SRs issued by the trusts.

But, market experts say the critical factor would be the transfer pricing. "The banks, which are also the shareholders of NARCL, will try to transfer the assets at a lesser discount to book value. This would inflate the acquisition cost vis-a-vis the expected realisation value. This will keep the investors' way," they say.

There is also a strong possibility of clubbing certain sector-specific assets for selling them to investors or distressed funds by way of SRs. But that would mean combining all the sector-specific trust under one roof. "This would be a complicated exercise. They could do it, but it would be better to try such models at a later stage," they add.

In the Union Budget 2021-22, the finance minister had announced the setting up of an ARC AMC to take over the existing stressed assets. The FM had said the ARC-AMC would manage and dispose of the assets to alternate investment funds (AIFs) and other investors for eventual value realisation.

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