The banking sector, battling with nearly Rs 8.5 lakh crore bad loans, will benefit from the Insolvency and Bankruptcy Code. By January or March, banks will be able to shave off Rs 2.5 lakh crore worth of assets, says Vinayak Bahuguna, CEO and MD of Arcil (Asset Reconstruction Company (India) Limited.
In an exclusive interview with Moneycontrol's Beena Parmar, Bahuguna believes there should be a greater scope for new investors to enter and provide additional funding to companies under the IBC. He adds that that sale of NPAs to asset reconstruction companies should be in 100 percent cash.
How does the year ahead look for NPA sales to ARCs?
On the face of it, the initial attempts via Insolvency and Bankruptcy Code will bear fruit. I think by January or before March, a large chunk will be off the system. That will address Rs 2.5 lakh crore worth of assets.
We would be looking at Rs 3,000-4,000 crore worth of assets in the SME and mid-corporate segments; retail would be there but its value will remain in a few hundred crore rupees. We have shortlisted a few (mid-corporate assets) and will be bidding now, typically with Rs 5,000 crore debt or less.
We are seeing banks including SBI (State Bank of India) coming out for sales, given that it has got a lot of assets from its associates and will continue to sell to clean up their books. Now that the cash market is developing, banks who haven’t sold in the past like Bank of Baroda, Bank of India or Canara Bank are also coming forward. Even PNB (Punjab National Bank) and ICICI Bank are looking at it. With more banks coming in, prices will get competitive.
How much share does large corporates have in your total book?
About one third or 35 percent of it. We will increase it and probably take it to about 50-60 percent over 24-30 months. All the big ones (resolutions) would happen now in the next two years with the IBC.
What is the reason for not participating in assets under insolvency?
The 12 cases have too much concentration risks. Yes, we can look at tying up with investors but it would need a large investment from our own balance sheet and if I end up investing 50 percent of my networth in one case, it would be quite excessive. No investor will invest if we don’t bring in our money and it may or may not work out as expected…it’s not a risk worth taking.
What about interim financing in these insolvency cases?
Yes, there is the need. That is one area we want to explore and it has become competitive and yields will come down, nevertheless we want to do it.
The restriction we have today is the regulator doesn’t permit us to put money into accounts that we don’t already hold (investments). We have requested them to enlarge the scope as long as it is a non-preforming loan, owned by whichever lender; we should be able to put in money as and when the business requires.
It was said that with regulation on more upfront cash in ARC sales, banks would be more willing to sell.
Well, if you ask me it should be 100 percent cash and get rid of the asset in entirety. ARCs can look for investors willing to participate. We would be happy if it moves to an entire cash market. It would be more definitive for banks, provide a closure for the NPAs because the SRs (security receipts) to be redeemed at a later stage becomes an issue.
Earlier, there was less capital availability with no third-party investors; the transactions could not be concluded and hence it was not entirely cash. But then it led to fees and incentives being added and there was no guaranteed redemption of SRs, so banks continued to remain exposed which isn’t desirable. That is why the RBI also increased it to 90 percent cash by April next year or provide fully for it. That’s how, globally, it works. We have done a lot of cash deals (about 5-10 percent).
Banks were also hesitant to sell to ARCs as there haven’t been enough resolutions.
That’s a fair point. But to put it in perspective, in how many cases did the bankers sell all the debt in a company? So, 2 out 10 banks have sold and 8 are muddling around not knowing what to do. How does a buyer who got 2 banks’ approvals, manage to get the rest together in a common resolution plan? Bankers are driven by their accounting needs, provisions or losses. For me, it is an investment to get it out and churn much faster.
That is one big reason for resolutions to not have happened faster. In the past, the legal environment was also stuck. So quite often you (banks or ARCs) got entangled in a legal battle with borrowers which was done deliberately by borrowers at times. So ARCs were not able to get a reasonable size of debt aggregated very quickly. With IBC, I guess we will be able to demonstrate the resolution very quickly.
Also Read: Banks sell only 20% of bad loan assets to ARCs as they bet on better value from insolvency courts
Do you think the success of insolvency could deter banks to sell assets to ARCs?
That's true. It is a way to sort out the borrowers' debt but eventually whether you want to continue to carry that debt for a long time of 7-8 years is a question.
Are you hearing anything from the government or the RBI?
The government has demonstrated that they want banks to clean up NPAs and a part of their recapitalisation plan would be linked to it. The smarter banks wanting to be in the market will have to do it. That bit of new capital injection linked to the clean-up will be a good thing. Only when good pricing i.e. marketing pricing comes in, things will move.
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