Bad bank rushes to avoid an extension of licence deadline

Bad bank rushes to avoid an extension of licence deadline

MUMBAI : India’s bad bank is racing against time to close its first transaction before June 30 or it would have to request an extension from the Reserve Bank of India (RBI), two people who were aware of the development said.

National Asset Reconstruction Co. Ltd (NARCL), the state-backed asset conversion company, had previously set itself a March 31 deadline to 50,000 crore in counterfeit assets but failed to make it due to what bankers called procedural reasons.

The above-mentioned individuals, who both spoke on condition of anonymity, said that under RBI’s licensing standards, the bad bank must begin operations and complete a transaction by June 30.

However, NARCL is still in the process of valuing assets proposed to be sold by lenders.

After this, banks will learn at what discount the bad bank is ready to buy the toxic assets, then approach their respective boards for approval.

“At this point, it seems unlikely that the exercise will be completed before June 30. Seeking an extension from the regulator seems inevitable,” said one of the two individuals mentioned above, adding that there is a provision that allows for a 12-month extension beyond the deadline if the regulator agrees.

The second person said the bad bank is now expected to take over the first batch of non-performing assets only in July, a year after its founding. The asset rebuilding company was incorporated on July 7, 2021 with an initial registered capital of 100 crores.

“There is also a requirement to hold a Swiss Challenge auction for these assets upon receipt of a bid from NARCL. The entire process is expected to be completed by July,” said the second person.

Regulatory standards require banks to use the Swiss Challenge auction method when selling loans from: 100 crore and above. Under the Swiss Challenge method, after a bidder makes a bid, lenders publicly call for counter-bids to match it. If they do not receive counterbids above the reserve price, the first bid will stand. However, if counterbids exceed the reserve price, the first bidder has the option to match the highest counterbid.

The second person said that from the perspective of the banks, it is better to sell assets to the bad bank rather than take companies to the National Company Law Tribunal (NCLT) because they do not have to be involved in the process until the very end. involved . Under the NCLT process, lenders are required to form a committee of creditors and review resolution proposals under the Insolvency and Bankruptcy Code (IBC) and actively participate in the resolution process, while selling loans to ARC does not require such involvement.

Meanwhile, while bad banking transactions are moving at a slow pace, lenders have already dissolved about 20% of assets originally scheduled for transfer in two tranches, Mint reported May 13. Almost 40,000 crore in bad loans have been resolved since the announcement was first made.

After Finance Minister Nirmala Sitharaman announced plans to create a bad bank in February 2021, bankers had said roughly 2 trillion bad loans would gradually be transferred to the entity. It suffered delays after the Reserve Bank of India (RBI) said it was not happy with the proposed structure. Lenders then presented a revised proposal to the regulator.

Under the new structure approved by the regulator, NARCL will acquire and merge bad loan accounts from banks while India Debt Resolution Co. Ltd (IDRCL) will handle the settlement process under an exclusive arrangement. Despite the approval of the new structure, there are still more delays. The Financial Express reported on June 13 that RBI is unhappy about the lack of clarity about the regulatory oversight of asset manager IDRCL.

Souece By: livemint