Will bad bank cut down bad loans?

Mumbai: With Union Finance Minister announcing a provision of Rs30,600 crore in guarantees to NARCL to buy bad loans from banks, Bad Bank will be pivotal factor in ensuring banks' balance sheets are in good shape, say experts.

The Bad Bank has already started functioning from its temporary office at World Trade Centre in Mumbai.

Jaya Vaidhyanathan, CEO, BCT Digital, says: "I see the Finance Minister's roadmap on bad bank as a welcome move. The Rs30,600 crore government guarantee for security receipts issued by NARCL will be instrumental in improving recoverability. Eventually, this will be apivotal factor in ensuring banks' balance sheets are in good shape."

Most critically, with NARCL posing as a bidder, individual ARCs will be obliged to bid for loans at competitive rates, faster, curbing extremely low buyouts and circumventing delays.

"The fact that the ownership of NARCL is a joint PSB-private partnership elevates optimism and leaves expectations of recovery high. I also expect the involvement of the India Debt Resolution Company to expedite and add value to the entire process," she added.

The government has announced a guarantee scheme on the investment receipts issued by NARCL, which can make the security receipts a transferrable instrument.

However, a study by Kotak says that NARCL has no near-term impact of a material nature.

"We are quite closer to the formation of the bad bank. The NPLs (written-off or otherwise) exchanged for security receipts are fully provided, but we don't expect banks to reverse provisions. Faster resolutions of some of the bad loans and senior management bandwidth release to solve these bad loans are probably the best possible outcomes of the formation of NARCL,"observes the report.

As per the update, NARCL intends to acquire about Rs2 trillion of assets in phases through 15 per cent cash and 85 per cent in SRs. NARCL will be 51 per cent owned by PSU banks and is currently awaiting RBI approval for the ARC license. The guarantee is available for five years and intended tocover shortfall between the amount realized from the underlying assets and the face value of SRs. NARCL will work with India Debt Resolution Company Ltd (IDRCL). IDRCL will be the operational entity, which will manage the asset and engage with market professionals and turnaround experts. PSU banks and public financial institutions will hold a maximum of 49 per cent stake and the rest with private sector lenders. Analysts believe that banks will get 15 per cent cash on the identified value of bad loans (Rs 2 Trillion, of which Rs900 billion in first phase that has nearly 22 large exposures. These loans are fully provided in the books of the bank. The upfront cash received, 15 per cent of the written-down value, would be reversed while the provisions for the balance (value of security receipts) are unlikely to be reversed even if it is fully provided. As this cash is a smaller proportion and divided across public banks and a few private banks, the short-term impact is negligible. The larger release of provisions, if any, would be made as and when the cash is received on sale of these receipts or redemption of security receipts. The government guarantee on SRs can enable trading of these securities (or convert to cash in secondary market). The banks are unlikely to reverse any provisions with these banks in the past on this topic. A 15:85 (cash: SR) structure implies that the Rs306 billion would translate to Rs360 billion of marked-down value of non-performing loans (NPLs). The Rs2 trillion of NPLs purchase value would imply 18 percent recovery rate. Analysts also say that Bad Bank's best time has probably passed debt consolidation is the more relevant benefit. Analysts say that the move on Bad Bank was positive for SBI, IDBI Bank and Yes Bank along with other PSBs. In case, recovery dips below the SR face value, then Govt guarantee can be invoked on the pool of assets. This guarantee is valid for next 5 years. 'We expect Government announcement to facilitate the cleaning-up of the last round of the large NPA's identified under the AQR of the RBI over the last 5 years. In the current context, we expect IDBI Bank, Yes Bank and SBI to be the major beneficiaries in the first round of

the Assets Buyout by the NRCL, says a report by Ashika Institution Research.