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A string of initiatives has been taken by the Reserve bank of India to create a vibrant loan restructuring market.
Banks are allowed to amortise their loss arising out of a non-performing asset, or NPA, by selling it to an asset reconstruction company, or ARC, over eight quarters. This provision, which was initially there till March 2015, has been extended by one more year.
To encourage banks to sell their stressed assets, RBI has increased the percentage of the loan purchase amount to be paid to banks in cash from 5 per cent to 15 per cent. In addition, the definition of a bad loan has been widened: banks can now sell any loan on which payment has been due for more than 60 days, down from 90 days earlier.
But despite these measures, there is still a long way to go before India gets a vibrant asset sale market, which is vital since Indian banks are sitting on bad loans worth Rs 3 lakh crore.
The perennial problem an ARC faces is to convince all banks in a consortium to simultaneously sell their bad loans. An ARC finds it difficult to secure finance to rebuild assets if at least 60 per cent of the consortium has not agreed to sell their loans. To convince a majority of the lenders to sell an asset can take as long as two years, which delays the revival of the asset.
To address this issue, ARCs want the concept of consortium sale to emerge. If banks can collectively decide on loan restructuring, why can't a consortium approach be taken while selling bad assets?
The second issue is with valuation. "Banks need to be realistic while arriving at the value. Some banks set the reserve price more than the loan value. The deal cannot fructify if such conditions are imposed," says a senior official from an ARC.
ARCs are worried about margins, especially as now they have to pay 15 per cent of the asset purchase price in cash. Earlier, ARCs could pay just 5 per cent in cash and the rest in security receipts.
"We need 20-22 per cent margins to run a viable business. With the cash component going up, the margins will come under pressure if banks do not agree on realistic prices," the official says. Banks typically offer 10-15 per cent discount on asset sale. The ARCs want this to increase to 30-40 per cent.
Private-sector banks are more pro-active, in comparison. HDFC Bank recently sold a loan of Rs 550 crore to Edelweiss ARC, one of the leading firms in the asset reconstruction business, at 40 per cent discount. Among public sector banks, State Bank of India is the only lender which has adopted asset sale as a strategy to clean up its balance sheet.
"We have a clearly laid-out system now. There is a particular day on which the information memorandum on whatever is there on the books of the stressed asset management group is circulated. There is a specific day when we receive bids from all the ARCs, and there is a date given when we open the bids. Everything is now according to a calendar. We have tried to take out the seasonality factor," SBI Chairman Arundhati Bhattacharya recently told Business Standard.
ARCs are beset with problems too. Raising capital is their biggest challenge. According to a study conducted by rating agency Crisil and Assocham, the capital base of 15 ARCs in the country was Rs 20,000 crore as on March 31, 2015. "If ARCs are to absorb the entire incremental NPA of FY16, they need to double their capital base. This would require participation from entities such as private equity and distressed assets funds," said the study.
Crisil estimates ARCs will be able to acquire only 20 per cent of the Rs 60,000 crore fresh NPAs that are likely to be added in the current financial year. Regulatory constraints limit their scope for raising capital: they are not allowed to go for initial public offerings and there is a cap of 49 per cent on the sponsor's stake. This is a big problem because not all stakeholders are often in agreement to infuse capital.
The chief executives of ARCs met Union finance ministry officials recently to highlight the challenges they are facing. "The feedback was positive. We expect some steps will be initiated by the authorities to resolve the issues," says the CEO of an ARC.
