Transferring 18 NPAs to bad bank by October-end a tall order: Bankers

There is no way that lenders can bypass established regulatory norms including the step of inviting counter bids under Swiss challenge method, they said

The National Asset Reconstruction Company (NARCL) is currently targeting to buy 18 distressed accounts by the end of October, even though it has bought none, so far. 

So, what has changed on the ground to give it the confidence that this target is achievable?

The ARC, promoted by public sector banks, and its sister concern India Debt Resolution Company (IDRCL) are now functional and there are teams of experienced professionals in place. Yet, it may prove to be a tall order for the newly minted entity to compress the regulatory and accounting processes involved in account transfers to meet the aggressive target, according to bankers. 

The processes would involve NARCL making a binding offer to a lender and then the board of the bank approving it. This shall be followed by a Swiss Challenge – giving an opportunity to other investors to match NARCL’s offer. All this shall take considerable time, pushing the deadline beyond the end of October, bankers said.

At best two-three accounts that comply with all the norms may move to the ARC in October, they said.

A senior State Bank of India executive said the offer for three accounts, including Rainbow Papers, had been made long back but the lender believed it was too low. There may be a revised offer from ARC and if that is acceptable to the bank, these accounts may get transferred by the end of October, the SBI executive said.  

NARCL has been working on various accounts for which information is available and it may make offers to lenders soon. But the acceptance process shall take time, banking sources said.

The first formal target for NARCL was set in January 2022 under which banks were to transfer 15 NPA accounts worth Rs 50,000 crore by March 2022. The entity could not meet that target as equity and guarantees came close to the end of FY22. Again the target was set for the end of the first quarter of FY23 but then there was a change in NARCL’s leadership, pointed out an adviser with a consultancy firm.

In June, the current executive chief executive, Natarajan Sundar, a former State Bank of India executive, was appointed to succeed P M Nair, who piloted the task of setting up the ARC during his one-year stint.

Lenders are under pressure from the government to show results and bank chiefs were ticked off by the finance ministry last week for delays. The idea of NARCL was articulated in the 2021-22 Union Budget, and the government extended guarantees for security receipts that the ARC would issue for acquiring assets.   

Senior executives with public sector banks said the wheels have been in set in motion to offer a few NPA accounts but there are “multiple things that need to fall in place”.

Lenders cannot bypass established regulatory norms, including inviting counter bids under Swiss Challenge, they said.

India Ratings in a response to queries from Business Standard noted almost Rs 40,000-50,000 crore worth of assets could be transferred in the first phase before Q3FY23, with total quantum touching Rs 90,000 crore by the end of FY23, if the system functions smoothly.

The functioning of NARCL and IDRCL are positive for the financial system as they provide one more avenue for the resolution of assets, besides the IBC process, it said.

But valuations are unlikely to exceed 15-20 per cent of NPAs and cash receipts by banks will be 15 per cent of that amount. This implies that the benefit for banks shall be negligible, although from the headline gross non-performing assets ratio perspective, it will look lower given the transfer of such assets to NARCL for resolution, the rating agency added.