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Bad Bank AMC hits regulatory hurdle; bad debt transfer delayed

By on June 12, 2022 0

The Reserve Bank of India (RBI) has expressed concern over the lack of clarity in the regulatory oversight of an Asset Management Company (AMC) proposed to be established under the umbrella structure of the National Asset Reconstruction Company Ltd. (NARCL), or the so-called bad bank, people familiar with the matter told FE.

This, coupled with other operational issues, has delayed the transfer of large bad loans of around Rs 50,000 crore to NARCL in the first phase compared to the original targeted deadline of March 2022.

“The RBI asked while they will have a regulatory/supervisory role over the NARCL, to whom is this AMC responsible? This is a valid question and the issue should be resolved soon. Bad debts can then be transferred to NARCL,” one of the sources said. Another source said the matter was still “under review”.

A banking source said the RBI may soon take a decision on the matter, after discussing the matter with relevant stakeholders. As the NARCL concept is new to India, once regulatory clarity is established, it will pave the way for the establishment of similar entities in the future, he said.

In January, State Bank of India (SBI) Chairman Dinesh Khara said that NARCL had received all approvals to start operations and that a total of 38 non-performing asset (NPA) accounts of worth Rs 82,845 crore had already been identified to be transferred to NARCL in phases.

According to the plan, NARCL will acquire the bad assets by making an offer to the main bank. Once its offer is accepted, the India Debt Resolution Company (IDRCL), which is being set up as the AMC under the NARCL, will manage the bad debts, value them and eventually resell them. In total, it is estimated that large NPAs worth Rs 2 trillion will be transferred to NARCL over five years.

NARCL owns shares in 15 lenders, mostly public sector banks (PSBs), and Canara Bank is the sponsoring bank. Under the previous plan, PSBs own 51% of NARCL and private actors own the rest. Similarly, public banks and public financial institutions will hold a 49% stake in the IDRCL, with the remainder held by private lenders.

In September 2021, the Cabinet had approved a proposal to offer a Sovereign Guarantee on Security Receipts (SR) issued by NARCL, which is expected to cost the Treasury Rs 30,600 crore over five years. Although the government provides a guarantee on the SRs, it has not contributed to the equity of the bad bank. In the FY22 budget, Finance Minister Nirmala Sitharaman announced the launch of the process of creating the bad bank.

Explaining why he chose to support NARCL when 28 private ARCs are already operational, government officials said these entities lack sufficient financial and operational muscle to handle large stressed assets of Rs 500 crore or more – the kind of NPAs that would be transferred to the wrong bank.

The RBI had, in December 2021, warned that commercial banks’ bad loans could reach between 8.1% and 9.5% under varying degrees of stress by September 2022, up from 6.9% in September 2021. In this light, rapid operationalization of the NARCL is gaining importance. Of course, the central bank had pointed out that banks were generally well placed to withstand credit shocks, thanks to good capital adequacy.

Last month, NARCL appointed former SBI Deputy Director General Natarajan Sundar as Director General and Managing Director. Similarly, he appointed Karnam Sekar, former managing director and CEO of Indian Overseas Bank, as non-executive chairman last month.