Near-resolution assets may not go to bad bank amid Covid-19 pandemic | Business Standard News

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ARC expected to be functional next month

Where there is a resolution likely in one or two months, and the order of the National Company Law Tribunal has been pronounced, such cases may not be considered

Stressed assets close to being resolved and for which a one-time settlement is under process may not be transferred to the new bad bank, which is expected to be functional next month.

Where there is a resolution likely in one or two months, and the order of the National Company Law Tribunal has been pronounced, such cases may not be considered.

There is no point transferring such assets to the National Asset Reconstruction Company (NARC) and resuming the process, said a senior executive with State Bank of India (SBI).

Seconding this view, another senior public sector banker said transferring near-resolution assets to the NARC might stretch the process. Getting money from resolutions on time would help lenders when the pandemic has created uncertainty on the quality of assets.

“It could work as a cushion when the second wave of the pandemic is expected to bring additional stress, and consequent burden for provision,” he said.

The process of transferring assets to the new bad bank may be delayed by one or two months due to disruption caused by the pandemic, according to officials involved in the process.

A senior executive with a large public sector bank said transfers of assets to the bad bank were supposed to start this quarter itself, “but this might probably be impacted (delayed) because the decision will have to be taken by consensus, the Joint Lenders Forum (JLF for each case), and passing a resolution for transferring these assets.” Stressed assets may be transferred to the bad bank from July, he added.

The work on the NARC would be on the lines the government has determined, including the sovereign guarantee on security receipts that will be provided by the Centre.

Bankers, along with the Indian Banks Association (IBA), are working on the finer details of the proposed bank, and most of the work on setting up such an institution has been completed, said a senior government official.

“Once the final structure of the bad bank is complete and when we receive the proposal, a decision on providing the sovereign guarantee by the government will be taken,” the official said.

The government is expected to provide a guarantee on the 85 per cent of the amount that will have to be paid to acquire stressed assets, in security receipts.


The equity structure or the holding of lenders, including non-banking financial companies such as Power Finance Corporation and REC, in the bad bank is also being worked out by the IBA, the official quoted above said.

Banks, collectively, will have to register the new entity with the Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi).

Besides the ARC, an asset management company (AMC) and an alternative investment fund (AIF) are being set up. The AMC, with experienced professionals, will operate the assets for some time and find an investor or an AIF through which it can be disposed of through a market price discovery mechanism.

Offers to buy bad loan pools from lenders may commence in June-July. The government expects the bad bank to take over stressed assets worth Rs 2.2 trillion, which existing ARCs have not been able to resolve.

Most bad assets have been on banks for more than two-three years and hence hold very high provisions against exposure, in some cases close to 100 per cent. Hence, lenders are not expecting burden (of setting aside more amounts as provisions) when these assets get transferred to ARC.

The Reserve Bank of India (RBI) has said that loans classified as fraud cannot be sold to NARC. According to the Annual Report of the RBI, about Rs 1.9 trillion of loans have been classified as fraud as of March 2020.

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