Stressed debt worth Rs 1.25 trillion on NARCL's radar: Economic Survey

State-owned National Asset Reconstruction Company (NARCL) is eyeing stressed debt acquisitions totaling Rs 1.25 trillion, with offers for assets in different stages of acquisition, due diligence. Of the Rs 1.25 trillion, evaluations for assets valued at around Rs 40,000 crore are currently underway, the Economic Survey for 2023-24 stated on Monday.  

So far, NARCL has acquired stressed debt from 18 accounts, worth Rs 92,000 crore, including the acquisition of the ailing Srei Infrastructure Finance and Srei Equipment Finance as resolution applicants.

Incorporated in 2021, with majority stake held by public sector banks and the balance by private sector banks, NARCL has the mandate to acquire fully provisioned stressed assets from banks. NARCL acquires stressed debt on a 15:85 cash to security receipts structure.

The survey has pointed out that ARCs are emerging as an alternative channel for investors, including foreign portfolio investors (FPIs), to access the non-performing assets (NPAs) /distressed assets held by banks. Data shows, in FY23, ARCs acquired about 9.7 per cent of the gross NPAs of banks, compared to 3.2 per cent in FY22.

According to the survey, the NPA market needs sufficient investors to ensure there is efficient price discovery. Also, it has to have adequate liquidity to support acquisition. "Apart from direct measures taken to reduce the gross NPAs, the government is building systemic strength in the NPA market, with market based interventions to improve liquidity and competition by establishing a bad bank and encouraging the insolvency and bankruptcy ecosystem", the survey said. 

Commenting on the Insolvency and Bankruptcy process, the survey said, “In the eight years since 2016, 31,394 corporate debtors involving a value of Rs 13.9 trillion have been disposed of (including pre-admission case disposals) as of March 2024”.

The loss of control immediately after admission into the resolution process has led debtors to settle with creditors as soon as the applications are filed with the National Company Law Tribunal (NCLT). “A singularly notable fact is that Rs 10.2 trillion of underlying defaults were addressed at the pre-admission stage. This change in debtor behaviour has been a big boon for banks and other lending institutions. The Code has created an optimal incentive-disincentive mix to facilitate above-board and transparent dealings in creditor-debtor relations”, it said. 

Data indicates that approximately Rs 3.36 trillion has been realized through approved resolution plans under the Insolvency and Bankruptcy Code (IBC). Moreover, over 3,000 businesses have emerged out of the resolution process, with continued business operations extending the productive use of resources trapped due to financial distress in these corporate debtors.

The survey has also mentioned that nine of the twelve large accounts that were referred by the central bank for resolution have yielded 54 per cent recovery.

“The IBC has established itself as an indispensable component of the asset recovery and reconstruction market. In the process, it has forever changed the credit market landscape in the country for good”, the survey said.