MUMBAI : Lenders decided to initially transfer 22 bad debt accounts from ₹89,000 crore to the National Asset Reconstruction Company Ltd (NARCL), which has helped clean up their balance sheets, said a senior banker.
The total amount of bad debts likely to be transferred to the trenches will be ₹2,000 billion. As announced in the Union budget on February 1, it is planned to create a bad debt bank to house bad debts of ₹500 crore and more, in a structure that will contain an Asset Reconstruction Company (ARC) and an Asset Management Company (AMC) to manage and recover failed assets. Once completed, the transfer would relieve banks struggling with more than ₹7 trillion in bad debts.
“The Association of Indian Banks (IBA) has asked lead banks to convene meetings and have approval ready so that as soon as the ARC is formed, they can start the process. I think the evaluation of the first phase covered 22 accounts of approximately ₹89,000 crore, ”said Rajkiran Rai G, President of IBA and Managing Director of Union Bank of India.
Rai qualified his assessment by saying that the banks have identified accounts that can go to the CRA in the first phase and have arrived at that number. However, once the CRA is formed, management will review these assets and only if they find it worthwhile, will they make an offer.
Like some of its peer banks, Union Bank of India is expected to take a 9% stake in the asset rebuilding company.
“What we did was preliminary work to keep the pitch ready so that when the RCAF is registered it can take off quickly. We have widely identified the accounts where there are almost 100% provisions and are above ₹500 crore exposure, ”said Rai.
The main advantage of this proposed ARC, he said, is the ability to pool bad debts from all members of the consortium. Currently, 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 for quick decision making when it comes to consolidating resolution plans.
“This CRA will manage the above assets ₹500 crore and the main benefit of NARCL is the aggregation of debt. They should be able to take all of the asset so that decision making is quick, ”said Rai, adding that existing CRAs do not have the capacity to purchase large assets at the level of the company. industry.
“So they just make piecemeal settlements. Their capacities are very limited and will therefore continue to be so in the space below. ₹500 crores, ”he said.
Asked if there will be any loans transferred to this CRA after the first ₹89,000 crore, Rai explained that more loans will be transferred in stages.
“The initial estimate is that this business can take around ₹2,000 billion bad debts. These numbers are estimates from IBA and the banking industry and once the CRA is formed, these calls will be taken by the CRA. Basically, it is estimated that about ₹2,000 billion NPA can gradually disappear, “he added.
Care Ratings estimates that once the transfer of ₹$ 2 trillion is complete, the revised gross bad debt ratio could be at about the same levels ahead of the Reserve Bank of India (RBI) asset quality review exercise in 2015.
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