If all lenders come on board, the National Asset Reconstruction Company (NARC) announced in the budget will be able to aggregate 100 per cent of a sick company’s outstanding loans, which shall ultimately lead to better resolution of the asset quality stress for all.
The government is yet to announce the specific contours of the NARC or the bad bank and has also only said that it is willing to provide some sovereign guarantee to help the platform.
“For this model to succeed, it cannot just be mostly for public sector banks. Yes, they will take a lead role in this but as we understand at this point of time, NARC will be all encompassing. It will take into account PSBs, private sector banks and for that matter any financial institution which has an exposure to the identified account,” Swaminathan said, speaking at an online seminar.
The present set of over two dozen ARCs have not been able to achieve decent numbers on debt aggregation and get stuck under 40 per cent in many cases, which has a bearing on the final resolution as well, he said.
“This ARC (the bad bank), since it is mandated and backed by the government, it is going to be a smoother affair in terms of all the banks deciding together to transfer the entire asset. Which means that the aggregation is going to be near 100 pc and there is going to be an AMC structure. So, together, we expect this to be a winning formula,” the confident SBI executive said.
“We are ‘very close’ for the bad bank to be a reality” and added that the dual structure of being both an asset reconstruction company as well as an asset management company will be of help, he said.
At present, financial industry stakeholders are being reached out to gauge their interest and one of the entities will take the lead once the potential shareholders are in place.
The lead bank or financier will have a stake of over 100 per cent, and apply to the RBI for licence to operate as an ARC, he said, stressing that funding or capital is not a problem for the bad bank.
The bad bank will operate on the prevalent 15:85 structure, where only 15 per cent will be paid as cash and the rest would be security receipts, he said, adding that this model will ensure that the fund initial fund requirements are not very high.
He said there is a group within the country’s largest lender working out a slew of modalities, including the potential assets which can be transferred to the NARC, capital required etc.
One of the unanswered aspects which will eventually get solved is the ways to put a value to the government guarantee which will ride alongside the security receipts.
Explaining the ways of working, he said NARC will offer a specific price for an asset to the banks and await the nod from the joint lenders forum to go ahead with a resolution. Once the amount is quoted, the lenders can reach out to other ARCs in the system and NARC will have the opportunity to revise its bid as well, he said, adding that there is a scope for price discovery.
A majority of lenders will have to be on board before the asset is transferred to NARC, he said, adding that the definition of ‘majority’ is likely to be the one as done by the Insolvency and Bankruptcy Code.