Bad bank AMC hits regulatory hurdle; transfer of bad loans delayed

The Reserve Bank of India (RBI) has raised concerns over the lack of clarity on the regulatory oversight of an asset management company (AMC) that was proposed to be set up under the overarching structure of the National Asset Reconstruction Company Ltd (NARCL), or the so-called bad bank, people familiar with the matter told FE.

This, coupled with some other operational issues, has delayed the transfer of large bad loans of about Rs 50,000 crore to the NARCL in the first phase from the initial targeted deadline of March 2022.

“The RBI has asked while it will have regulatory/supervisory role over the NARCL, whom is this AMC accountable to? It’s a valid question and the matter is expected to be resolved soon. Bad loans can then be transferred to the NARCL,” said one of the sources. Another source said the issue is still “under examination”.

A banking source said the RBI may soon take a decision on the matter, having discussed the issue with relevant stakeholders. As the NARCL concept is new to India, once regulatory clarity is established, it will pave the way for the setting up of similar entities in future, he said.

In January, State Bank of India (SBI) chairman Dinesh Khara said the NARCL had received all approvals to start operations and a total of 38 non-performing asset (NPA) accounts worth Rs 82,845 crore were already identified to be transferred to the NARCL in phases.

As per the plan, the NARCL will acquire bad assets by making an offer to the lead bank. Once its offer is accepted, the India Debt Resolution Company (IDRCL), which is being set up as an AMC under the NARCL, will manage the bad loans, add value to them and finally sell them off. In all, large NPAs worth Rs 2 trillion were estimated to be transferred to the NARCL over five years.

The NARCL has shareholding from 15 lenders, mainly public-sector banks (PSBs), and Canara Bank is the sponsor bank. According to the earlier plan, PSBs will hold 51% in NARCL and private players will own the rest. Similarly, state-run banks and public financial institutions will have a 49% stake in IDRCL, and the rest will be held by private lenders.

In September 2021, the Cabinet had approved a proposal to offer sovereign guarantee on the security receipts (SRs) issued by the NARCL, which is estimated to cost the exchequer Rs 30,600 crore over five years. Although the government is giving guarantee on the SRs, it has not contributed to the equity of the bad bank. In the Budget for FY22, finance minister Nirmala Sitharaman had announced the initiation of the process to set up the bad bank.

Explaining the reason as to why it chose to back the NARCL when 28 private ARCs are already operational, government officials had said that these entities had lacked adequate financial and operational muscle to work out large stressed assets of Rs 500 crore or more — the kind of NPAs that would be transferred to the bad bank.

The RBI had, in December 2021, warned that bad loans of commercial banks could rise to anywhere between 8.1% and 9.5% under varied degrees of stress by September 2022, from 6.9% in September 2021. In this light, swift operationalisation of the NARCL assumes importance. Of course, the central bank had highlighted that banks were generally well-placed to weather credit-related shocks, thanks to sound capital adequacy.

NARCL last month roped in former SBI deputy managing director Natarajan Sundar as its MD and chief executive. Similarly, it appointed Karnam Sekar, former MD & CEO of Indian Overseas Bank, as its non-executive chairman last month.

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