Unstress the stressed, for less bankaches – The Economic Times*

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/unstress-the-stressed-for-less-bankaches/articleshow/96180293.cms

Synopsis

Scrapping the waiting period will help in faster debt aggregation, given that the same borrower is classified differently by different lenders, depending on the record of recovery. This will improve the performance of ARCs typically saddled with vintage loans.

RBI‘s move to enable banks to sell all stressed loans that are in default to asset reconstruction companies (ARCs) is pragmatic. The rule change raises chances of an early turnaround of stressed assets. Earlier, lenders had to wait until the loan was in default for more than 60 days, or classified as a non-performing asset (NPA) for them to be transferred to ARCs.

Scrapping the waiting period will help in faster debt aggregation, given that the same borrower is classified differently by different lenders, depending on the record of recovery. This will improve the performance of ARCs typically saddled with vintage loans.

The sale of bad loans at the sign of first distress will enable banks to fetch a better price and lower their haircuts. This rule change is well-timed as banks will need to make provisions on expected credit losses when India shifts to Indian Accounting Standards (Ind-AS).

Banks invest in the security receipts issued by ARCs that make the recoveries. ARCs characterise patient capital that can buy bankrupt companies, run portions that can be run profitably, and sell off those to buyers looking to buy, to get optimal value of the assets. In October, RBI had made changes in their regulatory framework. This included raising their minimum capital requirement and letting ARCs buy stressed assets of failed companies under the bankruptcy code. But banks prefer to sell bad loans to ARCs, rather than use the bankruptcy route that delays resolution.

RBI should broaden the investor base of security receipts to enable ARCs to raise more funds. An expert committee recommended the inclusion of high net-worth individuals and corporates in the list of qualified buyers. Non-banking finance companies (NBFCs) and housing finance companies (HFCs) not notified as financial institutions, trusts, pension funds and distressed asset funds also feature in this list with the condition that defaulting promoters should not gain access to secured assets through security receipts. India also needs a vibrant secondary debt market for better liquidity in the system.

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