Lender’s reluctance to accept Security receipts (SRs) and wait through the resolution period and time taken in negotiation for value of stressed loans has impacted the work of National Asset Reconstruction Company Limited (NARCL), according to its senior executive.
Despite making binding offers for the acquisition of aggregated debt of Rs 1.70 trillion, the debt acquired to date was only Rs 25,000 crore, said Purshotam Agarwal, chief investment officer of NARCL. Agarwal wrote an article “All that you wanted to know about NARCL” in ARC World, monthly (September 2023) newsletter of Association of ARCs in India.
Dwelling on reasons for lower-than-expected conversion, he said apprehensions in value mismatch in offers given by NARCL, delays in granting individual approvals, and developments in other resolution strategies including restructuring and settlement with lenders impacted the work at ARC.
The SRs issued by NARCL carry government guarantees as such resolution mechanisms to deal with a backlog of NPAs typically require a backstop facility. This imparts credibility and provides for contingency buffers.
According to the government statement in September 2021, the guarantee of up to Rs 30,600 crore will back SRs issued by NARCL. The guarantee will be valid for five years.
NARCL was intended to resolve stressed loan assets above Rs 500 crore each amounting to about Rs 2 trillion. In phase I, fully provisioned assets of about Rs. 90,000 crore are expected to be transferred to NARCL, while the remaining assets with lower provisions would be transferred in phase II.
During the maiden year of operations, processes have since been streamlined to a large extent. Considering the unique structure of the twin companies (NARCL and IDRCL) for managing the assets, it is natural it took time to put in place systems and procedures to support the workflow process.
NARCL has been set up by banks to aggregate and consolidate stressed assets for subsequent resolution. PSBs will maintain 51 per cent ownership in NARCL.
IDRCL is a service company and operational entity which will manage the asset and engage market professionals and turnaround experts. PSBs and Public Financial Institutions hold a maximum of 49 per cent stake and the rest is with private sector lenders.
Agarwal said since inception, lenders have referred 125 accounts with debt exposure of Rs 3.5 trillion for evaluation to NARCL. To date, NARCL, after a due diligence process, has submitted binding offers in 30 accounts with debt exposure of Rs 1.70 trillion. This includes two accounts with debt exposure of Rs 32,000 crore as a resolution applicant. During Fy23, Reserve Bank of India allowed ARCs to submit a resolution plan under IBC as a resolution applicant.
Furthermore, another 30 accounts with debt exposure of Rs 70,000 crore are at different stages of evaluation, he added.
NARCL has acquired four assets, and there are two more assets in the pipeline (where a Letter of Acceptance has been issued to NARCL after the Swiss Challenge process) with aggregated debt exposure of Rs 25,000 crore.
The success of NARCL in the timely resolution of these NBFC accounts (Kolkata based Srei) would pave the way for the enhanced role of ARCs in the resolution of stressed assets. More collaborative opportunities would emerge for the industry, he added.