Given that the Center has already done its part by injecting Rs 3.4 lakh crore of capital into state banks during FY16-FY21, one is not clear why they now need a sovereign guarantee of Rs 30,600 crore to support security receipts (SR ) to be issued by National Asset Reconstruction Company Limited (NARCL). Apparently, this guarantee is intended to cover the deficit between the amount obtained from the underlying assets and the nominal value of the SRs.
Furthermore, RSs become attractive negotiable instruments in the market if they are backed by a guarantee. In perspective, the problem of non-performing assets (NPA) was created by the banks in the first place and therefore they need to find the solution; the way they keep begging is unseemly. They should focus on recovering what they have lost on their own rather than relying on the government. For its part, the government should ask them to stand firm.
While the idea of a bad bank is always bad because it creates moral hazard, as has been argued in this paper for the past five years, there is the advantage of aggregating credit exposures. Otherwise, the divergent selling interests of the lenders make resolution a long and often inconclusive process. Also, recovery is a specialized skill and the process would be more efficient if a professional team were at work.
All of the stressed loans that NARCL will acquire from the lenders have been granted, if not up to 100%, then up to 90% or perhaps 75%. Much of the capital that allowed this provisioning, at least for state lenders, comes from the government. To that extent, there will be little or no impact on banks’ balance sheets when assets are transferred. In fact, banks will receive 15% of the asset value – an average of 18% – in cash that goes directly to the bottom line; the remaining 85% would be in the form of RS.
But why exactly must SRs be backed by a warranty? It is the responsibility of India Debt Resolution Company Ltd (IDRCL), the operating entity, which will manage the assets and interact with market professionals and restructuring experts, to obtain good value for bad loans. Lenders are the largest sponsors of NARCL and IDRCL; it is your responsibility to make sure the two entities get the job done.
They must ensure that these entities are adequately staffed with top-notch professionals and that the fee structure is designed to incentivize rapid recovery. As experts have pointed out, whenever possible, businesses should be revived to make them more attractive to potential buyers.
One point here about the role resolution professionals (PRs) have played in the corporate insolvency resolution process (CIRP) under the IBC: Their performance has been somewhat uneven. Lenders must also ensure that deliberate defaulters and errant borrowers stay clear of the decision makers at NARCL and IDRCL. This is an opportunity for our banks to show that they are capable of working in the common interest.
Having obtained this undeserved generosity, they should try to recover as much as possible. Just because they’ve been given the capital to cover bad loan exposures doesn’t mean they stop fighting for recoveries. They have gotten away with ’15-20 crore lakhs of ANP, much of the taxpayers’ money; they cannot be allowed to lose more.