Private asset rejig companies will need cash to boost bad loans business

2021-02-18 22:30:00

MUMBAI: Private asset reconstruction companies (ARCs) will need to come up with upfront cash or provide bank guarantees if they intend to compete with the national asset reconstruction company (NARC) for purchase of bad loans.
According to banking sources, lenders have already identified corporate loans of over Rs 1.5 lakh crore to be transferred to the NARC, which will be promoted in the public sector. The NARC will offer to purchase bad loans at a negotiated rate. However, once a negotiated rate is struck, private ARCs will be allowed to better the bid.
Typically, ARCs purchase loans by offering 15% cash and the remaining 85% in security receipts (SRs), which entitle banks to get a return in line with the amount recovered. Since the return under the SRs are uncertain, deals have not been taking place. Now, an NARC will offer a sovereign guarantee for its SRs, which will turn them into triple-A rated instruments.

“The negotiated amount is based on the realisable value of the bad loan of which banks have a fairly good idea. While the NARC will have the advantage of a sovereign guarantee, private ARCs will also be in a better position than before as alternate investment funds (AIFs) have been allowed to invest in stressed loans, which opens new avenues for immediate monetisation,” said a banker.
The loans that have been identified by banks are those where the lenders already have 75% voting rights, which would mean that they are in position to push through a decision. By inviting private ARCs to participate in a ‘Swiss auction’ — where others are asked to better bids by an anchor investor — would ensure that there is no accusation of the assets being sold at a marked-down price.
“Transferring the loans to an ARC will ensure that bad loan numbers do not rise because of Covid-related stress,” the banker said. The NARC that takes over the bad loans will have a public sector character. But the asset management company that will work toward resolution of the non-performing assets (NPAs) will be a private entity with professionals whose sole focus would be value-maximisation.

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