If we need to peep into FY 2021 for the expectations and anticipations for the asset reconstruction companies (ARCs), we need to recognise that in the last two years very few debt assignment transactions have fructified, particularly from the public sector banks, which hold a large chunk of bad loans in their books.

While banks did put out stressed assets for sale, most of them were being put out on earlier occasions. Price expectations were high, and preference was for all-cash deals. Most banks have very high provision coverage ratio and have been getting capital infusion regularly, which to some extent takes away the pressure to find alternative resolution process, like sale to ARCs.

Banks have in the recent past tried to have better price discovery through a Swiss challenge. Most of such auctions relate to settlement with promoters/borrowers, who might source their funds through collateral sale, ARCs, etc. This relates to a limited number of cases, as the Swiss challenge process per se needs an anchor bid.

As regards the experience of ARCs, particularly Edelweiss ARC, relatively large assets with clear business sustainability were put through a resolution process to preserve the capital investment, employment and economic value. Many such borrowers were also extended additional funding to meet liquidity needs and fast track the revival. Recovery from such assets has also been good and the entire exercise and effort is very satisfying. With respect to the enforcement of securities, the delay in the legal process does limit the resolution efficiency.

NCLT has resulted in some great recoveries and resolutions, but a large number of cases have gone into liquidation with very little recovery prospects. On portfolio basis, we are fairly confident that a large part of the security receipts (SRs) of lenders under the 15:85 structure would be redeemed over the trust life period of eight years with upside return in some cases.

As regards the future, it is expected that in Q4 of FY 2021 and during FY 2022, there could be a higher incidence of non-performing assets (NPAs) after regulatory forbearance/restructuring on account of the pandemic. Most of the stressed larger corporate accounts have already been classified as NPAs and lending to this sector in the last couple of years has been very low. Consequently, it is expected that a major part of these fresh NPAs would be in the micro, small & medium enterprises (MSME) and retail sector.

Resolution of smaller NPAs spread across the country need a larger bandwidth of the bank infrastructure and human resource who are already burdened with multiple tasks and cannot be expected to have a focused approach for NPA resolution. Though banks have built central control and monitoring systems with enhanced system-based infrastructure, NPA resolution needs specific skill set at every point of action.

Further, banks have realised that the best results are when the NPAs are resolved or recovered as soon as the account turns non-performing. Wherever the assets were assigned much later than the account turned NPAs, banks would initially try to resolve the accounts through their own infrastructure. The recovery has not been encouraging.

Presently, banks would find it difficult to assign fresh NPAs as the sale consideration may warrant higher immediate provision, though, in the long run, the actual recovery could be higher. Some of the procedural constraints and non-availability of relief for provision on SR-based assignments result in lenders seeking all-cash transactions. This means higher investment by ARCs/funds, leading to much lower sale consideration to the lenders’ net return expectation of these entities.

With regard to ARCs, their role is not fully appreciated by the capital market. As the resolution of NPAs does take time and the market is currently oriented to cash transactions, ARCs need to raise higher capital and would also need funding lines to tide over temporary cash flow mismatches. However, the banking sector has not been extending reasonable credit lines to the ARCs. In the circumstance, ARCs are not able to participate largely in cash-based auctions of NPAs.

While funds have become more active in the distressed asset acquisition, their focus presently is on larger assets with a clear revivability/sustainable business model, with or without additional funding. While this would address part of the NPA book of lenders, voluminous (by number and geographic location) medium and smaller NPAs requiring granular hand-holding, collateral enforcement actions and legal actions will need adequate infrastructure and skill set in these areas. ARCs do meet these requirements.

To get out of this logjam in NPA resolution through the ARC industry, a concerted effort is required from all stakeholders, with ARCs being able to raise sufficient resources from the capital market/banking system based on its overall financial strength and resolution capabilities, lenders selling their NPAs soon after the slippage at an appropriate price, the regulator considering relaxing the provisioning norms on SR-based sale of NPAs.

ARCs can also play the role of a resolution agent in lending their expertise and infrastructure to take pools of assets of lenders for resolution for a fee, without actually acquiring the assets. The infrastructure and skill sets of ARCs can also be a good platform for new overseas funds wanting to enter the distressed assets space in the country.

(The writer is Edelweiss MD & CEO RK Bansal )