Bad Bank rushes to avoid extended license deadline

Bombay India’s bad bank is racing against time to complete its first deal by June 30 or else it would have to seek an extension from the Reserve Bank of India (RBI), two people with knowledge of the development have said.

National Asset Reconstruction Co. Ltd (NARCL), the state-backed asset recovery company, had previously set itself a deadline of March 31 to acquire 50,000 crore in failed assets but failed to meet it due to what bankers called procedural reasons.

The people quoted above, who both spoke on condition of anonymity, said that under RBI licensing standards, the bad bank must begin operations and complete a transaction by June 30.

However, NARCL is still evaluating assets offered for sale by lenders.

Following this, the banks will learn at what price the bad bank is willing to buy the toxic assets and then approach their respective boards for approval.

“At this time, it seems unlikely that the exercise will be completed before June 30. Asking the regulator for an extension seems inevitable,” said one of the two people quoted above, adding that there is a provision that allows for a 12-month extension beyond the deadline if the regulator agrees. .

The second person said that the bad bank is now expected to take over the first batch of non-performing assets only in July, a year after its creation. The asset reconstruction company was established on July 7, 2021 with an initial authorized capital of 100 crore.

“There is also a need to launch a Swiss Challenge auction for these assets after receiving an offer from NARCL. The whole process should be finished by July,” the second person said.

Regulatory standards require banks to use the Swiss Challenge auction method when selling mortgage loans. 100 crore and more. Under the Swiss Challenge method, after a bidder makes a bid, lenders issue a public call for counterbids to match it. If they do not receive counter-offers beyond the minimum markup price, the first offer remains valid. However, if the counterbids exceed the minimum price, the original bidder has the option of matching the highest counterbid.

The second person said that from the perspective of banks, it is better to sell assets to the wrong bank than to take companies to the National Company Law Tribunal (NCLT) because they will not need be involved in the process until the very end. . Under the NCLT process, lenders are required to form a creditors’ committee and review proposed resolutions under the Insolvency and Bankruptcy Code (IBC) and actively participate in the resolution process, while that the sale of loans to ARC does not require such involvement.

Meanwhile, as failing banks’ operations unfold at a slow pace, lenders have already resolved about 20% of assets originally slated for transfer in two tranches, Mint reported on May 13. Almost 40,000 crore of bad debts have been resolved since the first announcement.

After Finance Minister Nirmala Sitharaman announced plans to set up a bad bank in February 2021, bankers said that about 2,000 billion bad debts would be gradually transferred to the entity. It suffered from delays after the Reserve Bank of India (RBI) expressed dissatisfaction with the proposed structure. The lenders then submitted a revised proposal to the regulator.

Under the new structure approved by the regulator, NARCL will acquire and consolidate banks’ bad loan accounts, while India Debt Resolution Co. Ltd (IDRCL) will manage the resolution process under an exclusive agreement. There are still store delays despite the approval of the new structure. The Financial Express reported on June 13 that RBI was unhappy with the lack of clarity on the regulatory oversight of asset management firm, IRDCL.

Emails sent to spokespersons for RBI and NARCL went unanswered.

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About Brandon A. Hood

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