The aggregate amount of bad loans likely to be transferred in trenches will be ₹2 trillion
Once completed, the transfer would relieve banks that are saddled with over ₹7 trillion of bad debt
Lenders have decided to initially transfer 22 bad loan accounts of ₹89,000 crore to the proposed National Asset Reconstruction Company Ltd (NARCL), aiding the cleanup of their balance sheets, a senior banker said.
The aggregate amount of bad loans likely to be transferred in trenches will be ₹2 trillion. As announced in the Union budget on 1 February, the plan is to create a bad bank to house bad loans of ₹500 crore and above, in a structure that will contain an asset reconstruction company (ARC) and an asset management company (AMC) to manage and recover dud assets. Once completed, the transfer would relieve banks that are saddled with over ₹7 trillion of bad debt.
“The Indian Banks’ Association (IBA) has asked lead banks to call for meetings and keep an approval ready so that as soon as the ARC is formed, they can start the process. I think the assessment in the first phase was for 22 accounts of about ₹89,000 crore," said Rajkiran Rai G, chairman of IBA and the chief executive of Union Bank of India.
Rai qualified his assessment saying that banks have identified accounts which can go to the ARC in the first phase and have arrived at this number. However, once the ARC is formed, the management will look at these assets and only if they find that it is worthwhile, they will make an offer.
Like some of its peer banks, Union Bank of India is likely to take a 9% stake in the asset reconstruction company.
“What we have done is a preliminary work to keep the ground ready so that when the ARC is registered, it can take off quickly. We have broadly identified the accounts where there is almost close to 100% provisions and are above ₹500 crore in exposure," said Rai.
The primary advantage of this proposed ARC, he said, is the ability to aggregate bad loans from all members of the consortium. At present, most ARCs buy bad assets from individual banks while other banks may choose not to part with their exposure in the same loan. This poses a challenge to quick decision-making when it comes to firming up resolution plans.
“This ARC will handle assets above ₹500 crore and the main advantage of the NARCL is debt aggregation. They should be able to take the whole asset so that decision making will be quick," said Rai, adding that the existing ARCs do not have the capability to buy big assets at the industry level.
“So, they are doing only piecemeal settlements. Their capabilities are very limited and so they will continue to be in the space of below ₹500 crore," he said.
Asked if there will be loans transferred to this ARC after the initial ₹89,000 crore, Rai explained that more loans will be transferred in stages.
“The initial estimate is that this company can take about ₹2 trillion of bad loans. These numbers are estimates of IBA and the banking industry and once the ARC is formed, those calls will be taken by it. Roughly, we estimate that about ₹2 trillion of NPAs can gradually go," he added.
Care Ratings believes that once the transfer of ₹2 trillion is complete, the revised gross bad loan ratio could be around the same levels prior to the asset quality review exercise conducted by the Reserve Bank of India (RBI) in 2015.
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