Bad bank gets going, despite RBI silence

Under the NCLT process, lenders are required to form a committee of creditors, vet resolution proposals under IBC, and take active part in resolution process.  (Photo: Mint)
Under the NCLT process, lenders are required to form a committee of creditors, vet resolution proposals under IBC, and take active part in resolution process.  (Photo: Mint)

Summary

  • NARCL proceeds  with  due  diligence  on  other  assets  following submission  of  the  bid  for  Rainbow  Papers
  • The bad bank planned to complete 50,000 crore transactions by 31 March but failed

MUMBAI : The Reserve Bank of India (RBI) has not responded to the sovereign-backed bad bank’s request to consider its bid for a bad asset as evidence of starting operations, a person aware of the matter said, prompting it to begin evaluating more assets.

The bad bank, National Asset Reconstruction Co. Ltd (NARCL), planned to complete transactions of 50,000 crore by 31 March but failed to conclude any due to what bankers called procedural reasons.

However, even by the RBI deadline of 30 June, it submitted a single bid—a 1,100-crore bad loan owed by Rainbow Papers Ltd.

If the RBI does not accept this bid as a demonstration of commencement of operation, NARCL must apply for an extension of the licence deadline, something it is trying to avoid.

“The bad bank wrote to RBI late last month informing that the bid for Rainbow Papers has come before 30 June. It had asked whether the fact that a bid has been made before the due date can be considered as a start of operations," said the person cited above, adding the regulator has not responded yet, which the bad bank interprets as implicit approval from RBI.

“Since the RBI has not rejected the proposal, we believe the request has been approved and are therefore going ahead with valuing other assets that are to be sold. However, if the RBI later rejects the proposal, we would have to seek an extension for the asset reconstruction company (ARC) licence," the person said on condition of anonymity.

After the RBI deadline of 30 June, NARCL submitted a bid for another loan, the person cited above said. However, Mint could not ascertain the name of the company.

Given that the bad bank has made offers for just two of the 15 assets it had earmarked for the first tranche, bankers said it would certainly take another couple of months before the transfer of toxic assets could happen.

They said banks had approached their respective boards to seek approval to sell the loans to NARCL at the current price offered by the bad bank. Following this, they would also have to run a Swiss Challenge auction to meet regulatory requirements.

Under the Swiss Challenge method, after a bidder makes an offer, lenders publicly call for counter-bids to match it. The first offer sticks if they don’t receive counter-bids beyond the minimum markup price.

However, if counter-bids cross the minimum price, the initial bidder has the option to match the highest counter-bid.

After finance minister Nirmala Sitharaman announced plans to set up a bad bank in February 2021, bankers had said that about 2 trillion of bad loans would be gradually transferred to the entity.

However, it suffered delays after the Reserve Bank of India (RBI) said it was unhappy with the proposed structure. Lenders then presented a revised proposal to the regulator.

Under the new structure approved by the regulator, NARCL will acquire and aggregate bad loan accounts from banks, while India Debt Resolution Co. Ltd will handle the resolution process under an exclusive arrangement.

Emails sent to spokespeople for RBI and NARCL remained unanswered.

Meanwhile, as bad bank operations proceed slowly, lenders have already resolved about 20% of the assets planned initially for transfer in two tranches, Mint reported on 13 May. Almost 40,000 crore of bad loans have been resolved since the announcement was made.

Mint earlier reported that from the banks’ perspective, it’s better to sell assets to the bad bank instead of taking companies to the National Company Law Tribunal (NCLT) since they won’t need to be involved in the process till the very end.

Under the NCLT process, lenders are required to form a committee of creditors, vet resolution proposals under the Insolvency and Bankruptcy Code, and take an active part in the resolution process, while selling loans to ARC needs no such involvement.

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