There were expectations that the Budget would announce the setting up of a ‘bad bank’ to take over the bad loans of all other banks.
With bad loans growing at an accelerated pace in the recent quarters, there have been reports the Centre is toying with the idea of setting up a National Asset Management Company to which banks can transfer their bad loans and clean up their balance sheet.
But instead, the Centre sought to tackle some of the issues that existing asset reconstruction companies (ARCs) face.
That said, there are other issues that need to be tackled as well to make ARCs more effective. Judicial delays, for one, that have impacted the recovery process also need to be addressed by giving a go-ahead to the proposed bankruptcy law.
Stumbling block Though the Budget has proposed several measures, such as raising the single investor cap in ARCs, low returns to shareholders remains a stumbling block. After the RBI raised the minimum upfront payment from ARCs in August 2014, returns have particularly taken a hit.
Instead of taking upfront cash payments, banks were willing to accept delayed payments in the form of ‘security receipts’ (SRs).
ARCs were earlier making a minimum down payment of 5 per cent and paying the balance 95 per cent to the bank against SRs. The RBI increased the upfront payment to 15 per cent.
In the 15/85 structure, the return to ARCs has come down substantially. At 1.5 per cent management fee, the internal rate of return works out to 7 per cent, against 20-22 per cent in the earlier 5/95 structure.
While industry players feel this has been a move in the right direction, and will ensure that ARCs have more skin in the game, this once again opened up the issue of pricing of bad loans.
The regulator should nudge banks to come clean on their assessment of the actual value of the bad loans on their book. They should be willing to take the tough decision to write off dud loans, and take a huge haircut on sale of assets.
Other tweaks Currently, the bank that sells non-performing assets doubles up as investor in SRs. There is a need to open up SRs to all institutional players in debt, helping widen the investor base. The Centre has to amend the Sarfaesi Act to give power to the RBI to specify the category of investors.
There is also a need to evolve a process by which all lenders can be brought on the same page with regard to selling of bad loans to ARCs. Many a times, revival becomes very difficult, as all group lenders do not sell their assets to ARCs.
There is also a need to ensure faster recovery of loans. Judicial interventions and inefficacy of debt recovery tribunals (DRTs) have hampered speedy recovery by existing ARCs.
The proposed bankruptcy law needs to be put in place quickly to hasten the insolvency resolution process.
Excessive delays Undue delays erode the value of the underlying asset, and lenders recover only a fraction of their loans. Currently, banks take as long as 15 years in certain cases to recover their money, which erodes the value of the assets substantially.
According to a World Bank report, creditors in India recover only 25 cents to a dollar, compared with 36 cents in China and a substantial 80 cents in the US.