The Indian Banks’ Association (IBA) has asked members to identify large loans where they are lead bankers and get approval from co-lenders so that these loans can be sold to a National Asset Reconstruction Company (NARC, or the bad bank).
The association has identified 102 corporate bad loans, totalling to Rs 2 lakh crore, where the amount outstanding in each is over Rs 500 crore. They include loans in a variety of industries. These have been languishing in the books of banks for years with many admitted under the insolvency process. These loans are almost fully provided for over the years and they exclude the ones where there is fraud involved or those currently under liquidation. Approval from 75% of the lenders by value is required to transfer the loans to an ARC.
The IBA had proposed a public sector bad bank to take over bad loans of Indian lenders. A bad bank is expected to be more efficient in recovery as it will step into the shoes of multiple lenders who currently have different compulsions when it comes to resolving a bad loan. “In the first phase, lenders are expected to approve the transfer of 30-40 loans by next week,” said a senior banker. He said that the framework for transferring the loans from the books of banks is already in place.
Once the lenders decide on selling the loan, the NARC will make them an offer based on the scope of recovery. With the NARC’s offer on hand, the lenders will hold a ‘Swiss Challenge’, where rivals are allowed to better the offer made by a chosen bidder.
While rival ARCs in the private sector will be given an option to bid, it is unlikely they will succeed. This is because the security receipts issued by the NARC for 85% of the value of the loans would be guaranteed by the government. Since private companies do not have government guarantee, they can only hope to win if they can provide cash.
The advantage for banks is that these 102 loans have been largely provided for. The NARC will be paying up to 15% of the agreed value for the loans in cash. The NARC is also expected to do a good job in recovery as it will create a trust that will assign the task to an asset management company (AMC) in the private sector. Each corporate nonperforming asset (NPA) will be converted into a special purpose vehicle, which will be sold by the AMC.