As the government is gearing up to strengthen the bank's ability to recover bad loans and improve their non-performing asset recovery mechanism, The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) act is likely to be amended. The act deals with rules governing loan securitization and is expected to be a major booster for financial institutions.
P Rudran, MD & CEO of ARCIL believes this will make debt reconstruction easier and will therefore, reduce the burden of the concerned company to a certain extent. Hence, the new rules will be useful for the financial institutions as well as the borrowers, feels Rudran.
The act also includes a clause that allows banks and financial institutions to accept movable as well as immovable property to settle the claims. Rudran is of the view that it is a very positive step as it will prevent cartelisation and help the borrower realise the true value of his assets.
SL Bansal, CMD of Oriental Bank of Commerce is of the opinion that so far the banks were at the mercy of the borrower as there was a provision for classifying accounts as non-performing assets. However, the new amendments will strengthen the financial institutions and give them more power to deal with such accounts, he added.
Morevoer, the enabling clause for conversion of debt into equity will make the banks as well as the asset reconstruction companies more comfortable, clarified Bansal. Overall, it is a welcome step from the government and will go a long way in improving the health of the banking industry, he stated.
Here is the edited transcript of the interview on CNBC-TV18.
Q: One of the important things you told me was that you can now convert part of your debt into equity and that was not allowed earlier, this amendment allows you to convert debt into equity. Now does this mean that you will be able to take over more assets from the banks or you will be able to turn them around faster?
Rudran: More than taking over more assets from the banks, reconstruction will become much easier because when debt is more there is a lot of burden on the borrower which can be reduced to a certain extent if we can do a structuring of the debt component. It will in turn reduce the financial burden of the company for some time.
And if I am sure that the unit is going to make good profit later, potential viabilities can be established. In that case, I will reduce the loan amount and the financial burden of the company will come down. Later when the company is doing well, I will be able to take part in the share also because the share value will go up. So like a PE investment I will not be making any loss, in fact my profit earnings can be improved by this method.
Q: I wanted to focus on one clause which says that banking and financial institutions can accept immovable as well as movable property to settle their claims. Can you take us through the rationale behind that and how positive a development it is?
Rudran: The rationale is many times you will find when we go for sale or bids have to be submitted, people come and see the property but they actually don’t submit their bid due to some kind of cartelization taking place. Sometimes the promoter himself will drive it in such a manner that nobody will purchase his property.
This will act as a deterrent for such activities, preventing cartelization because the bidders would very well know that if they are not going to bid for it the lenders themselves can at least take over the assets at the reserve price because there is a certain reserve price. And many people will not bid for it or they will always bid less than the reserve price.
This will act as a deterrent for such activities and this will help in a big way because the value of the asset will be realized and the borrower also will be benefitted because his liability can be brought down.
Q: What is the collective impact of the amendments passed? One of course as Mr. Rudran was saying you can keep back immovable property if you are not able to sell it off. The settlement that you reach bilaterally with a borrower will now have to be recognized by the Debt Recovery Tribunal (DRT). They cannot walk in another direction or obstruct a settlement that you arrive at. This along with the conversion of equity into debt, together is it making a seminal difference? Do you think you can reconstruct your NPLs faster because of these amendments?
Bansal: There are two-three good things which have happened in this amendment. One, the permission for holding the asset on my book. Normally, in India you know how the property market operates. First of all the people are not sure whether they will get a good title or not despite the fact that banks are passing a good title to the borrower. But, he is not sure.
Two, sometimes cartel comes into the picture and then people try to extract maximum benefit by buying this property and they would like to buy this property at a much cheaper price. Since the banks are permitted to hold on to these assets on their books for some period after which they can naturally sell these assets subsequently, I think this will go a long way in enabling the bank to resolve the NPA quickly. This is so because first of all taking possession of the asset takes a long time and after taking possession, disposal unduly takes longer.
Ultimately, we continue to suffer as there is a provision for NPA. Once I take these assets on my book, at least I am relieved to the extent that property is on my book. If it is a residential property, I can put it to use for myself and if it is a commercial property, I can put it to use for myself or dispose it off.
All these things will go a long way in putting a deterrent on the borrower that now the banks have an enabling clause where they can buy these assets directly. Till date, borrower feels that so long as the bank is in a position to put up another purchaser, it will not be able to dispose off the assets. I think this is a welcome step which the Government of India has taken and as banks are now struggling with a huge amount of NPA this will be a good thing.
Secondly, this enabling clause for conversion of debt into the equity will go a long way in the sense that banks will be more comfortable and the Asset Reconstruction Company (ARC) will also be comfortable. If they see that the unit is viable then they can convert this debt into equity and can continue to hold or at some stage enforce a change in management also.
Till date, we are at the mercy of the borrower. In today's environment, it sometimes feels that it comes as a matter of pride to classify an account as NPA and the bank remains in an extremely helpless situation. I think these amendments will go a long way in improving the health of the banking industry.
Q: Do you expect therefore that the recovery number which you all post at the end of every quarter to dramatically increase in the next six months?
Bansal: Let us understand one thing. Our problem in India is if today the government announces a decision then we expect the entire environment to change from tomorrow onwards.
After two quarters of course it may change, but you cannot expect some dramatic change in the quarter ending December. I think it will start from the quarter ending June, meaning thereby April 1 to June. Since the banks are now empowered, it will take a certain space of around 60 days notice for taking possession and then disposing it off. All this takes 90 to 120 days.
I think starting from quarter ending June FY13 onwards the recovery will show at least 25 percent increase and the banks will be comfortable in disposing of these assets. I think it will go a long way in improving the health of the sector in the year ending FY13-14 and FY14-15.
Q: How exactly do you expect the gross NPA, net NPA situation to pan out in 2013? There are a lot of bullish comments or rather there is a huge run in the stock markets in a lot of these PSU banks. Does the fundamentals actually justify the valuations which they are possibly trading at this point?
Bansal: I do not think any fundamental change happened. But, liquidity in the system is driving the pricing of the stock.
Q: You said fundamentals have not changed a lot. Are you not getting a sense that in the system as a whole, NPLs are probably troughing out? You are not getting that sense at all?
Bansal: I think all of us understand that still there is lot of pain in the system and only those banks will be clear winners who properly put in place their recovery mechanism. All those banks which claim that their NPA has peaked, I think are not on the super reality, still there is a lot of pain in the system and some NPA will continue.
But, ultimately those banks which have put on their recovery mechanism in place will be the clear winners. I think whatever changes you are expecting in the system will start happening from the June quarter of FY13. There will be some pain in the next two quarters. The huge restructuring assets are lined up.
All these restructuring now will result in more provisioning starting from this quarter as the RBI has already stipulated. Huge NPA, NPV hit is also coming on the bank’s balance sheet. I do not think the NPA has ceased yet, but maybe March 13 will be the last quarter when the banks will show substantial NPA and thereafter it will be showing a downward trend.
Q: What is the total amount of assets that you have securitized so far from the banks?
Rudran: Our Assets Under Management (AUM) as on March 31 2012 was Rs 6,009 crore which has come down slightly as on September 30 because we have made good recoveries. Of course our acquisition has not gone to that extent because there have not been much acquisitions during this period as banks have not been willing to sell the assets because of the price differentiation. But, definitely I am sure by March 31, 2013 we will be able to acquire much more assets.
Q: How much are you possibly targeting in terms of an increase?
Rudran: I think this year we should be able to acquire a little over Rs 1,000 crore.