SynopsisThe newly-minted bad bank faces obstacles in the resolution of stressed assets as the final structure and contours of the institution get more of a public sector flavour than the originally envisaged private sector nature of the resolution company, bankers said.
Mumbai: The newly-minted bad bank faces obstacles in the resolution of stressed assets as the final structure and contours of the institution get more of a public sector flavour than the originally envisaged private sector nature of the resolution company, bankers said.
With the public sector-owned National Asset Reconstruction Co (NARCL) in charge of the resolution, its asset manager being owned by the private sector India Debt Resolution Co Ltd (IDRCL), there is scope for conflicts in the resolution approach given the former would have to comply with all government-related rules including that of vigilance and audit, which will slow down the recovery process, negating all the benefits of having a private sector asset manager, bankers said.
“All government rules will apply to NARCL and by default to the India Debt Resolution Co Ltd (IDRCL) since under the new structure, the NARCL is the sole decision making authority,” said a person closely involved in the formation of NARCL. “The IDRCL is now designated as a principal agent for NARCL, which means it cannot take any decisions regarding the resolution of these loans. This has negated the benefits of having a private sector entity as an asset manager namely quicker decision making, market-level remuneration and attracting the best talent.”
The original plan involved the setting up of an asset management company, which was supposed to resolve, restructure or sell these bad loans to a potential buyer. This company was envisaged as a private sector entity to give it the flexibility in decision making, which will quicken the resolution process.
However, the Reserve Bank of India (RBI) refused to give permission to this structure because according to the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act 2002, under which asset reconstruction companies are governed, only an ARC can can buy or sell bad loans. As a result, bankers have had to rejig the structure stripping the IDRCL of any decision making powers.
“What this means is that all the approvals have to necessarily come from NARCL. Moreover, the new ARC has to ensure a minimum rate of return for every asset. This formula-driven approach can cause problems in the future as no one can guarantee a minimum return for a bad loan. It is still early days but the model which was promised and which is now in front of us are totally different and more difficult to implement,” said a second person, who was also closely involved with the setting up of NARCL.
With public sector rules applying, the NARCL will also have to comply with the feared three Cs (Central Bureau of Investigation, Central Vigilance Commission and Comptroller and Auditor General), which has previously stalled decision making at public sector banks.
“The new structure of selling to a single ARC can also be challenged by other private ARCs as preferential treatment, though a Swiss challenge has been proposed to ensure price discovery. Aggrieved promoters can also challenge the structure in the future alleging lack of competitive process in selling the assets. All these are challenges which might be encountered,” said the second person quoted above.
The evolving complications are already visible as private sector talent has so far avoided taking up any posts within NARCL or IDRCL.
Former Crisil MD and HDFC co-founder Pradip Shah declined to be the chairman of NARCL after being offered the position while Aditya Birla ARC CEO Sanjay Jain refused to take up the CEO’s post because of the challenges with regard to decision making within the new structure, executives ET spoke to confirmed. As a result, both the companies are now headed by current or former State Bank of India executives instead of professionals from the private sector. SBI deputy managing director Subroto Biswas will be the interim chairman of NARCL while SBI chief general manager Padma Kumar Nair will be the CEO of the company.
On the other hand, IDRCL will be chaired by retired SBI executive Diwakar Gupta while Manish Makharia, head of SBI Mutual Fund’s AIF vertical, will take over as CEO of IDRCL. Bankers acknowledged that because of the to and fro with the RBI and the resultant change in structure, private sector executives have given the new bad bank a miss.
“There may be some more changes, which are in the works. All the appointments except that of Diwakar Gupta are on deputation and not permanent. We expect to have a new full-time chairman for NARCL, who will most probably be an independent member. CEOs also could be changed if we get better people. SBI has people to spare so, by default, their executives are chosen but it is still a work in progress,” said a third person familiar with the plans.
(Originally published on Jan 31, 2022, 05:59 AM IST)
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