bad bank structure

 https://pib.gov.in/PressReleasePage.aspx?PRID=1755466

1. What isNational Asset Reconstruction Company Limited (NARCL)? Who has set it up?

 

NARCL has been incorporated under the Companies Act and has applied to Reserve Bank of India for license as an Asset Reconstruction Company (ARC). NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution. PSBs will maintain51% ownership inNARCL.

2. What is India Debt Resolution Company Ltd. (IDRCL)? Who has set it up?

 

IDRCL is a service company/operational entity which will manage the asset and engage market professionals and turnaround experts. Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49% stake and the rest will be with private sector lenders.

3. Why is NARCL-IDRCL type structure needed when there are 28 existing ARCs?

 

Existing ARCs have been helpful in resolution of stressed assets especially for smaller value loans. Various available resolution mechanisms, including IBC have proved to be useful. However,considering the large stock of legacy NPAs, additional options/alternatives are needed and the NARCL-IRDCL structure announced in the Union Budget is this initiative.

4. Why is a Government Guarantee needed?

 

Resolution mechanisms of this nature which deal with a backlog of NPAs typically require a backstop from Government. This imparts credibility and provides for contingency buffers. Hence, GoI Guarantee of up to Rs 30,600 crore will back Security Receipts (SRs) issued by NARCL. The guarantee will be valid for 5 years. The condition precedent for invocation of guarantee would be resolution or liquidation. The guarantee shall cover the shortfall between the face value of the SR and the actual realisation. GoI’s guarantee will also enhance liquidity of SRs as such SRs are tradable.

 

5. How will NARCL and IDRCL work?

 

The NARCL will acquire assets by making an offer to the lead bank. Once NARCL’s offer is accepted, then, IDRCL will be engaged for management and value addition.

6. What benefit do banks get from this new structure?

 

It will incentivize quicker action on resolving stressed assets thereby helping in better value realization. This approach will also permit freeing up of personnel in banks to focus on increasing business and credit growth. As the holders of these stressed assets and SRs, banks will receive the gains. Further, it will bring about improvement in bank’s valuation and enhance their ability to raise market capital.

7. Why is it being set up now?

 

Insolvency and Bankruptcy Code (IBC), strengthening of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI Act) and Debt Recovery Tribunals, as well as setting up of dedicated Stressed Asset Management Verticals (SAMVs) in banks for large-value NPA accounts have brought sharper focus on recovery. In spite of these efforts, substantial amount of NPAs continue on balance sheets of banks primarily because the stock of bad loans as revealed by the Asset Quality Review is not only large but fragmented across various lenders. High levels of provisioning by banks against legacy NPAs has presented a unique opportunity for faster resolution.

8. Is the guarantee likely to be invoked?

 

Government guarantee will be invoked to cover the shortfall between the amount realised from the underlying assets and the face value of SRs issued for that asset, subject to overall ceiling of ₹30,600 crore, valid for 5 years. Since there shall be a pool of assets, it is reasonable to expect that realisation in many of them will be more than the acquisition cost.

9. How will Government ensure faster and timely resolution?

 

The GoI guarantee will be valid for five years and condition precedent for invocation of guarantee will be resolution or liquidation.Further, to disincentivize delay in resolution, NARCL has to pay a Guarantee fee which increase with passage of time.

10. What will be the capital structure of NARCL and how much will Government contribute?

 

Capitalization of NARCL would be through equity from banks and Non-Banking Financial Companies (NBFCs). it will also raise debt as required.The GoI guarantee will reduce upfront capitalization requirements.

11. What will be NARCL’s strategy for resolution of stressed assets?

 

NARCL is intended to resolve stressed loan assets above ₹500 crore each amounting to about ₹ 2 lakh crore. In phase I, fully provisioned assets of about Rs. 90,000 crores are expected to be transferred to NARCL, while the remaining assets with lower provisionswould be transferred in phase II.

Asset reconstruction companies

RBI has vide its circular dated 15th June, 2020 laid down fair practices code for Asset Reconstruction Companies and mandated them to adopt the same and abide by the same. 

The Gist of the Fair Practices Code is given below:

Fair Practices Code for Asset Reconstruction Companies In order to achieve the highest standards of transparency and fairness in dealing with stakeholders, Asset Reconstruction Companies (ARCs) are advised to put in place Fair Practices Code (FPC) duly approved by their Board. The following paragraphs provide the minimum regulatory expectation while each ARC’s Board is free to enhance its scope and coverage. The FPC must be followed in right earnest and the Board must involve itself in its evolution and proper implementation at all times. The FPC shall be placed in public domain for information of all stakeholders. 1. ARC shall follow transparent and non-discriminatory practices in acquisition of assets. It shall maintain arm’s length distance in the pursuit of transparency. 2. In order to enhance transparency in the process of sale of secured assets, (i) invitation for participation in auction shall be publicly solicited; the process should enable participation of as many prospective buyers as possible; (ii) terms and conditions of such sale may be decided in wider consultation with investors in the security receipts as per SARFAESI Act 2002; (iii) spirit of Section 29A of Insolvency and Bankruptcy Code, 2016 may be followed in dealing with prospective buyers. 3. ARCs shall release all securities on repayment of dues or on realisation of the outstanding amount of loan, subject to any legitimate right or lien for any other claim they may have against the borrower. If such right of set off is to be exercised, the borrower shall be given notice about the same with full particulars about the remaining claims and the conditions under which ARCs are entitled to retain the securities till the relevant claim is settled/ paid. 4. ARCs shall put in place Board approved policy on the management fee, expenses and incentives, if any, claimed from trusts under their management. The Board approved policy should be transparent and ensure that management fee is reasonable and proportionate to financial transactions. 5. ARCs intending to outsource any of their activity shall put in place a comprehensive outsourcing policy, approved by the Board, which incorporates, inter alia, criteria for selection of such activities as well as service providers, delegation of authority depending on risks and materiality and systems to monitor and review the operations of these activities/ service providers. ARC shall ensure that outsourcing arrangements neither diminish its ability to fulfil its obligations to customers and the RBI nor impede effective supervision by RBI. The outsourced agency, if owned/controlled by a director of the ARC, the same may be made part of the disclosures specified in the Master Circular. 6. In the matter of recovery of loans, ARCs shall not resort to harassment of the debtor. ARCs shall ensure that the staff are adequately trained to deal with customers in an appropriate manner. (i) ARCs shall put in place a Board approved Code of Conduct for Recovery Agents and obtain their undertaking to abide by that Code. ARCs, as principals, are responsible for the actions of their Recovery Agents. (ii) It is essential that the Recovery Agents observe strict customer confidentiality. (iii) ARCs shall ensure that Recovery Agents are properly trained to handle their responsibilities with care and sensitivity, particularly in respect of aspects such as hours of calling, privacy of customer information, etc. They should ensure that Recovery Agents do not induce adoption of uncivilized, unlawful and questionable behaviour or recovery process. 7. ARCs should constitute Grievance Redressal machinery within the organisation. The name and contact number of designated grievance redressal officer of the ARC should be mentioned in the communication with the borrowers. The designated officer should ensure that genuine grievances are redressed promptly. ARCs' Grievance Redressal machinery will also deal with the issue relating to services provided by the outsourced agency and recovery agents, if any. 8. ARCs shall keep the information, they come to acquire in course of their business, strictly confidential and shall not disclose the same to anyone including other companies in the group except when (i) required by law; (ii) there is duty towards public to reveal information; or (iii) there is borrower’s permission. 9. Compliance with FPC shall be subject to periodic review by the Board. Copy of RBI circular can be found here

CERSAI

Gist of RBI notification dated 27th December, 2018 follows

It is now mandatory for banks/ NBFCs etc. to file security interest created on immoveable property (other than equitable mortgage by deposit of title deeds), moveable and intangeable assets in CERSAI.

CERSAI is central registry of securitisation asset reconstruction and security interest of India. It is an online platform for registration of transaction of securitisation, asset reconstruction of financial assets, and creation of security interest over property as contemplated in the SARFAESI Act.

Please refer to circulars DBOD.Leg.No.BC.86/09.08.011/2010-11 dated April 21, 2011, RPCD.CO.RRB.BC.No.72/03.05.33/2010-11 dated May 19, 2011, DNBS.(PD). CC.No.24/SCRC/26.03.001/2010-2011 dated May 25, 2011 and RPCD.CO.RCB.BC. No.73/07.38.03/2010-11 dated May 26, 2011 advising banks/financial institutions(FIs) to register the transactions relating to securitization and reconstruction of financial assets and those relating to mortgage by deposit of title deeds with CERSAI.

2. The Government of India has subsequently issued a Gazette Notification dated January 22, 2016 for filing of the following types of security interest on the CERSAI portal:

1. Particulars of creation, modification or satisfaction of security interest in immovable property by mortgage other than mortgage by deposit of title deeds.
2. Particulars of creation, modification or satisfaction of security interest in hypothecation of plant and machinery, stocks, debts including book debts or receivables, whether existing or future.
3. Particulars of creation, modification or satisfaction of security interest in intangible assets, being know how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature.
4. Particulars of creation, modification or satisfaction of security interest in any ‘under construction’ residential or commercial or a part thereof by an agreement or instrument other than mortgage.

3. CERSAI had started registration of the data in respect of paragraphs 2 (a) to (c) above, for the security interests created on or after January 22, 2016, w.e.f. May 25, 2016 for Scheduled Commercial Banks and w.e.f. July 1, 2016 for all other entities registered with them. Further, the registration of data in respect of paragraph 2(d) above has commenced since June 8, 2017 for all banks and FIs registered with CERSAI. Meanwhile, the banks/ FIs have also started registering the security interests created before January 22, 2016 (subsisting records). However, it is observed that the extent of registration on the CERSAI portal is very low, both for current and subsisting records.

4. Banks/FIs are therefore advised to complete filing the charges pertaining to subsisting transactions by March 31, 2019. Banks/FIs are also advised to file the current charges relating to all transactions with CERSAI on an ongoing basis.