In the last decade, several countries, especially in Asia, experienced crisis in their economy and consequently in banking and reforms in most of the financial sector is growth of non performing loans (NPL) in the a direct bearing on profitability and to the stock of NPAs. In several countries, the NPAs assumed an alarmingly large proportion oftheir aggregate loans and also of their GDP. As can be observed from the table, the NPA problem in our country has not assumed such a magnitude that it can be termed as a having a serious impact on the viability and efficiency of the financial sector and the growth of era of controlled economy and regulated financial sector to post-liberalisation period of privatization and financial sector reforms, has led to increase in domestic and players, increased industrial & entrepreneurial activity and more efficient becoming uneconomic, low operating margins and strain on the industry. The seeds of credit excesses, sown in the boom cycles, which, in turn, compounded the NPA problem.
RBI Report, from Trend & Progress of Banking 2002 has banks in India have witnessed a decline over the past several years, they are still high as compared to developed country standards of around 2 per cent. Prompt remedial actions are, therefore warranted but it still India is 42.5% against gross NPAs, which is low as compared to international standards, where it is as high as provisioning practices. Policy for management of NPA problem in the system has to tackle ‘Stock’ (accumulation of NPAs) and ‘Flow’ (accretion) problems. NPA management approach needs to be upgraded at different stages of the strengthening of credit appraisal and by the regulators to tackle the ‘flow’ problem. Towards resolution of the ‘stock’ and enacted the Securitisation & Reconstruction Act 2002 in guidelines for Asset Reconstruction Companies and also for the Banks/FIs proposing to transfer the financial assets to of Asset Reconstruction Companies (ARCs) in the Indian Financial Sector and is expected to result in development of market for Non Performing Loans, which was so far nonexistent in the country.
ARCs have been used by several countries across the globe for management of their Non Performing or models of ARCs to resolve their NPA bugbear with varying degree of success depending upon a variety of factors ranging from the type of assets to the political climate although private capital can be introduced into the process as well. Keeping in view that ARCs are there to tackle the which it repays its initial and subsequent investors. ARCs have shown a mixed performance in resolution of NPA problem in different countries. Amongst the global ARCs, Securum of Sweden and RTC of the USA have been the most successful ones. While Securum followed the corporate approach. Assets transferred to Securum were mostly commercial real estate of large size while those in RTC related to real estate and consumer loan assets which could be sold off through KAMCO of Korea have shown better performance in recovery as compared to after the slow initial progress. China has no domestic institutional investors (other than the banking system) with pools of capital big enough to absorb such a resolve and administer such a mass of bad loans. Therefore, they needed the foreigners to invest in their has conducted bulk sale of NPLs and auctioned loans to foreign investors like Merill Lynch. Deutsche Bank etc. and has shown a recovery of 32%.
The system envisages multiple ARCs as Non Government entities with equity support of promoters. The Government is expected to have minimal participation in NPA resolution process. The ARCs in the country are not supported disposition agency, since NPA problem is not of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (Securitisation Act) and shall operate within the purview of RBI guidelines. RBI shall grant registration to the ARCs without which no ARC can of creditor’s right has been brought into the system through the secured creditors without the impediments of lengthy legal wrangles. Invocation of provisions under this Act abates the borrowers.
KEY ISSUES BEFORE ARCs
The concept of ARCs is evolving in our country and therefore certain issues pertaining to the valuation of financial assets, legal & regulatory measures, funding of the transaction and some other operational matters will get resolved gradually over a period of time. The value of financial assets proposed being acquired is one of the major issues required to be resolved for the loan of international determining ‘fair market value’ is uncertainties and subjective and lack of information is a major constraint.
The discount rate to be adopted in the valuation exercise leading to realistic pricing and allocation of loan value to different classes of secured lenders is a complex process. Resolving these issues and convergence of views of sellers (originators of the loan) and Arcil on transfer price is essential to conclude the deal. The sellers have their balance sheet management issues in view of lower provisions and some of the sellers may not be in a position to absorb up front losses arising out of transfer of financial assets to Arcil. In order to achieve a debt from various lenders and resolve inter creditor degree of importance due to multiple/consortium funding arrangements and prevalence of different agreements with borrowers.
In absence of funding sources, the sellers are expected to be investors as Qualified Institutional Buyers (QIBs) in the initial phase of the transaction. The market for NPAs is not developed and as such the domestic players do not have the resources whereas foreign investor has appetite only when high returns funding/Guarantee not available for transfer of restructured unit, moral hazard for power from for Banks/FIs will have to be overcome in the days to come for carrying forward the process of asset transfer to ARCs.
The ARCs will play an instrumental role in resolution of the NPA problem that is looming over the financial sector of Arcil has certain inherent advantages like freedom of decision making and greater operation of NPA problem and unlock productive capacities in the industry. It leads to healthier balance sheets for the banks which allow them to raise potential to bring about a medium-term structural banking sector solution to the financial sector and allows bankers to focus on their core activity-dispensation of credit to industry and other sectors of the economy.
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