Asset reconstruction companies, banks differ on cleaning up bad debts mess

India’s nearly Rs 10-trillion bad debt market has another problem. Asset Reconstruction Companies (ARCs), key players in the distressed assets markets, cannot agree with banks on how to go about resolving the bad debt mess.

Banks want to dispose of the assets at a deep discount, but for upfront payments. The deep discount works in favour of ARCs too, only if they had the cash.

Instead, the ARCs are requesting banks to go for the security receipts (SR) route, in which the ARCs put a minimum of 15 per cent of the value upfront, and the rest they manage to recover on behalf of banks, earning a fee in the process.

The recovery through this route is also good enough, claim ARCs, but the process involves a lengthy legal procedure. Capital-starved banks don’t have time for that.

As the banking system and the Reserve Bank of India (RBI) experiment with resolution frameworks, insolvency codes, and even luring foreign distressed assets funds by allowing banks to directly sell bad debts, bad assets are not selling fast enough.

Except for a few large accounts, the tail-end of the bad debt saga comprises accounts below Rs 1,000 crore. The ARCs typically would want to target these segments.

Of particular interest is a set of power sector projects, of about 500-600 megawatts each, going through insolvency process right now. These power sector loans were given for a minimum of Rs 6-7 crore per megawatt, but in the National Commission for Law Tribunal (NCLT), the assets are being auctioned for a mere Rs 1.1-1.2 crore per megawatt. Even taking into the reduced price, per project cost comes to around Rs 600-700 crore for the ARCs, but they may not have enough cash to buy them upfront.

“These power projects will surely take off, but we need to give them more time. They are going for so cheap, banks deserve to realise much better in value for these assets,” said R.K. Bansal, managing director at Edelweiss ARC.

“For many cases, NCLT may not be the ideal platform. You need to wait out; some sort of warehousing is needed. Security Receipts structure work well if there is value in the assets, and many assets getting sold now have huge future potential. Banks must have patience and let ARCs work their way," Bansal said.

According to a petition, as reported by news agency IANS, 34 power companies have accumulated Rs 1.4 trillion of NPA for Indian banks. Some of the large power projects due to banks include Adani Power Maharashtra (Rs 9,463.29 crore), Damodar Valley Corpora (Rs 9,756.42 crore), Jaiprakash Power Ventures (Rs 8,719.16 crore), KSK Mahanadi Power Company (Rs 14,165.12 crore), Jindal Thermal Power (Rs 5,594.21 crore), Prayagraj Power Generation (Rs 9,883.28 crore), Jaiprakash Power Ventures (Rs 8,719.16 crore), GNR Chhatishgarh Energy (Rs 5,325.28 crore) and DB Power (Rs 5,930.56 crore) among a host of others, the IANS reported.

Smaller power projects include Ind Barath Energy Utkal, Vandana Vidyut, Sai Varda, etc. Banks are willing to settle for smaller cases for as low as Rs 500-600 crore, against their loans of Rs 2-3,000 crores but ARCs say the realisation can be much more if the banks go through the security assets route.

“The bank gets 15 per cent upfront, and in most cases, the realisation is more than its 85 per cent contribution,” Bansal said.

However, banks are wary of the SR route considering the not so favourable experience they had when the SRs were drawn in the ratio of 5:95. The ARCs in this case had to put only 5 per cent of the equity and thus had less skin in the game.

Besides, according to a RBI rule, banks will have to provide for their investments in security receipts, which work as a disincentive, according to Jatin Nanaware, head of structured finance, India Ratings and Research.

“The capital-starved banks, therefore, wanted cash rather than continuing to carry on with provisioning burden. The situation gets even more complicated considering the number of banks in the RBI’s prompt corrective action (PCA) framework,” Nanaware said.

According to Nanaware, cash or SR route is a matter of negotiation between banks and the ARCs, and both have distinct advantages and disadvantages. However, for cash deals in large projects, ARCs have the option to rope in partners.

One such deal was where JM Financial ARC worked jointly with Reliance Industries for Alok Industries assets.

According to Prabhakar Shetty, chairman of JM Financial ARC, banks should not hurry. “In respect of cases where legal process is involved, banks can’t expect a quick resolution. They may have to wait,” Shetty said.

“ARC’s resources are limited, hence they cannot bid on a cash basis for bigger assets. In case of such assets, SRs are preferred,” Shetty said, adding that in the recent past “we have seen keen interest from foreign investors for joint participation in acquisition of assets from banks and also for acquisition of SRs in the secondary market from ARCs”.

A small-sized ARC’s executive did agree that it was getting tough to do business.

There is no aggregate data for how much of assets the banking system sold to ARCs recently.

Bankers, meanwhile, say they are open to SR route, but in cash deals, the recovery is upfront, and they also get to roll back the provisions.

ARC executives don’t agree with this assessment.

In most of the cases, provisions are not more than 50-60 per cent, but the assets are selling at 80 per cent discount. The bank’s balance sheet is getting hit by additional about 30 per cent provision, which could be more than the upfront payment the bank received, say ARC executives.