Transferring 18 NPAs to bad bank by October-end a tall order: Bankers

The goalpost has been shifting frequently for the National Asset Reconstruction Company Limited (NARCL) aka bad bank and it now plans to buy 18 distressed accounts by the end October, when so far it has bought not even one. So what has changed on the ground to give it the confidence that this target is achievable?

ARC, promoted by public sector banks and its sister concern India Debt Resolution Company Ltd (IDRCL) are already functional with a team of experienced professionals in place. Yet, it will be a tall order for newly minted entity to compress the regulatory and accounting process for transfer to reach an aggressive target. At best two-three accounts that comply with all norms could move to ARC in October, said bankers.

The first formal target for NARCL was articulated in January 2022 where banks were to transfer 15 NPA accounts worth Rs 50,000 crore by March 2022. The entity could not reach that target as equity and guarantees came close to year end (FY22). Next target date for transfer indicated was end of first quarter (June 2022) which again was an unrealistic aim, given change over in leadership, pointed out an adviser with consultancy firm.

In the same month new executive chief executive Natarajan Sundar, a former State Bank of India executive, was appointed to succeed P M Nair, who piloted the task of forming ARC during a one-year stint.

Lenders are under pressure from the government to show performance and bank chiefs were taken to task by the finance ministry last week for delays. The idea about bad bank was articulated in union budget for 2021-22 and the government has extended guarantees for security receipts that it NARCL would issue for acquiring assets.

Senior executives with public sector banks said the beginning has been made to offer few accounts. Now the team is in place but it is very difficult to adhere to such a time frame as there are multiple things which have to fall in place.

There is no way that lenders can bypass established regulatory norms including the step of inviting counter bids under Swiss challenge method, they said.

India Ratings in a response to queries from Business Standard said while there have been delays in comparison to the initial timelines for starting of their functioning and the amount for resolution has also declined. Almost Rs 40,000-50,000 crore of assets could be transferred in the first phase before Q3FY23 with the total quantum of transfer at Rs 90,000 crore in FY23 if the system functions smoothly.

The functioning of NARCL and IDRCL are positive for the financial system as they provide one more avenue for resolution of assets besides the IBC process.

Valuations are not likely to exceed 15-20% and cash receipts by banks will be 15% of this. This implies that the impact for banks will be negligible although from a headline Gross Non-Performing Assets (GNPAs) ratio perspective, the ratio will look lower given the transfer of assets to NARCL for resolution, the rating agency added.

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