asset reconstruction companiesasset reconstruction …indian banking -perspective zrbi reportrbi...
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Asset Reconstruction CompaniesAsset Reconstruction CompaniesSystemic response to NPL Management
Hari Hara Mishra
Indian Banking -Perspective
RBI report Trend and Progress of Banking 2013RBI report- Trend and Progress of Banking 2013 released on 21st November 2013
“At the present juncture, the key issues related to the Indian b ki t i l dbanking sector include:
effective reduction in NPAs and improvements in the loan recovery process; need to achieve sustainable financial inclusion through suitable business and delivery models; need to stimulate and foster competition in the banking sector and liberalize licensing policies; andneed for decisive changes in the present banking structure to enable it to grow in size, resources, efficiency and inclusivity”
Stress in the banking system (1/2)g y ( )
Rs in crore
2010 2011 2012 2013
Gross NPA (all banks) 84,747 97,922 1,42,300 1,94,000
Increase in NPA YOY 15,774 13,175 44,378 51,700
Restructured Advances (RA) 1,36,426 1,37,602 2,18,608 3,01,000
I i RA YOY 61 122 1 176 81 006 82 392Increase in RA YOY 61,122 1,176 81,006 82,392
Gross NPA as % Gross Advances (A) 2.5 2.3 2.9 3.6Advances (A)
RA as % to Gross Advances (B) 4.2 3.5 4.7 5.8
Total Stress as % to Gross Advances (A+B) 6.7 5.8 7.6 9.4
Stress in the banking system (2/2)g y ( )
Gross NPAs of banking system have gone up by around 2 timesi 2 f M h 2011 t M h 2013in 2 years from March 2011 to March 2013
Restructured Assets also have gone up by more than 2.times in2 years from March 2011 to March 2013
And the trend continues…
During H1 of FY14, Gross NPAs have grown by 38%. At thisrate, the NPAs are expected to go up by Rs 75,000 crore duringthe year 2013-14
As per CRISIL- Restructured Assets expected to go upto Rsp p g p4,00,000 crore as on March 2014 i.e an increase of Rs 1,00,000crore in one year alone.
Total Stress in the system (GNPA%+RA%) is estimated to haveTotal Stress in the system (GNPA%+RA%) is estimated to have exceeded 10% now in Sept 2013 – a record high in recent times
Implications… (1/2)p ( )
Increase in Gross NPAs will require additional provisioningIncrease in Gross NPAs will require additional provisioning
For restructured assets , provisioning norms have changed effective current financial year
5% on Fresh restructuring (flow) in 2013-14 and 3.5% as on March 2014 for existing stock- up from 2.75% as on March 2013
4.25% from March 31,2015/ 5% from March 31,2016 spread quarter wise
Most banks have reported sharp decline in profitability and some banks have started reporting losses in Sept 2013 (Central Bankbanks have started reporting losses in Sept 2013 (Central Bank of India -1509 crore/ United Bank of India -489 crore).
For the listed banks as a whole there has been a fall in profit of 24% vis a vis last half.
Implications… (2/2)p ( )
Impact of additional provisioning:Impact of additional provisioning:
Capital locked in sticky assets
Hampers credit creation and playing effective role in economic growthHampers credit creation and playing effective role in economic growth
Rating downgrades! Leading to rise in cost of funds
Constrains banks’ ability to raise capital ( ith i l t ti f BASELConstrains banks’ ability to raise capital (with implementation of BASEL III norms, capital requirement of banks to go up significantly)
Dampens overall investment climate of the economy
Structural optionsp
LEGAL VOLUNTARY
Corporate Debt Restructuring
− Forum of lenders under the aegis of RBI
SARFAESI 2002 – comprehensive foreclosure law − Provides for setting up of ARCs
Debt Recovery Tribunals – dedicatedBanks’ own workout
Debt Recovery Tribunals dedicated recovery courtsproposed repeal of SICA/ BIFR -to be replaced by NCLTs
Enhance Effectiveness of enforcement rights
Encourage lender driven restructuring
Creation of ARCs - backgroundg
20.0% Gross NPA %15.7%
14.4% 14.7%12.7%
11.4%10.4%
10 0%
15.0%
0 0%
5.0%
10.0%
The huge NPA levels in the late 90s… set alarm bells ringing.
0.0%FY1997 FY1998 FY1999 FY2000 FY2001 FY2002
Two committees, Narasimham Committee I & II and Verma Committee were set up to study the problem . A separate vehicle to address rising NPA was envisagedto address rising NPA was envisaged.
In 2002, SARFAESI Act was passed enabling creation of ARCs..
SARFAESI Act, 2002,
Provides for setting up of Asset Reconstruction Companies (ARCs)Provides for setting up of Asset Reconstruction Companies (ARCs)
Enables recovery of money without intervention of the Court of Law
Grants powers to lenders to foreclose security interest with a 60 daysG a ts po e s to e de s to o ec ose secu ty te est t a 60 daysNotice on receipt of consent of 75% (now changed to 60%) of theconcerned Lenders by Value,
Grants powers to lenders to reconstruct/ resolve NPAs through
Selling or leasing a part or whole of the business of the borrower
Settling d es pa able b the borro erSettling dues payable by the borrower
Taking possession and disposing the underlying security interest
Effecting change or takeover of management of the business of theEffecting change or takeover of management of the business of theborrower
ARC advantageg
Ch t i ti f I di B ki l dCharacteristics of Indian Banking landscape –
Large NPAs with Banks/FIs - mostly multiple/consortium lending
Different categories of charge and security profileDifferent categories of charge and security profile
Most of the resolution strategies require consent of 75% of lenders by value
Inter Creditor Issue - major stumbling block in driving effective resolutionj g g
Legacy issues hinder value maximization for banks originating NPAs
Resolution requires specialized skill sets, may not be available with the banks
Implication ---> Debt aggregation is key to successful resolution
Transaction Structure
Banks/ FIs ARCs as Asset
Sale of loan assets
Banks/ FIs ARCs as Asset Manager
Reconstruction through
43 5
PurchaseConsideration
loan assets
Trusts / Scheme Cash
B
Restructuring / Asset sale / M&A
6
5
Issuance of SRs
Schemeof ARCs realization Borrower
1 2 7of SRs
Investors
Redemption of SRs
Payment for Subscription to
SRs
1 2 7
Security Receipts (1/2)y p ( )
SARFAESI Act 2002 (Section 2(1)ZG) define SecuritySARFAESI Act 2002 (Section 2(1)ZG) define Security Receipt as under:
“Security Receipt” means a receipt or other security, issued bya securitization company or reconstruction company to anyQualified institutional buyer pursuant to a scheme, evidencingth h i iti b th h ld th f fthe purchase or acquisition by the holder thereof, of anundivided right, title or interest in the financial asset involved insecuritization
Security Receipts (2/2)y p ( )
RBI Circular dated May 28 2007 further elaborates the concept ofRBI Circular dated May 28,2007 further elaborates the concept of SRs :
SRs issued by SCs/RCs are predominantly backed by impaired assets SRsSRs issued by SCs/RCs are predominantly backed by impaired assets. SRshave the following unique features as compared to other types of securitiesissued on securitization of normal assetsa) SRs cannot be strictly characterized as debt instruments since they
combine the features of both equity and debt. However, these arerecognized as securities under Securities Contracts (Regulation)Act, 1956.
b) The cash flows from the underlying assets cannot be predicted in termsb) The cash flows from the underlying assets cannot be predicted in termsof value and intervals.
c) The investment in SRs is restricted to QIBs only.d) These instruments when rated would generally be below investmentd) These instruments when rated would generally be below investment
grade. These instruments are generally privately placed and presentlynot listed.
NPA Auctions – FY 2012-13
Rs in crore
Category No of Banks
No of Assets put on
Amount No of assets sold to ARCs
Book Value of Assets
% of closure of transactio
block sold to ARCs
ns
Public Sector 15 985 7900 77 480 6%BanksPrivate SectorBanks
9 210 1650 94 479 29%
Total 24 1195 9550 171 959 10%The primary reason for low consummation of NPA auctions is due to priceexpectation mismatch between banks and ARCs, contributed largely by the discountf t d i i f i k i t d ith hi h i l d ti t f
- Data compiled by ARC Association
factor and pricing of risks associated with recovery which include estimate ofrealizable amount and period of realization.
Flow of NPAs to ARCs
250 000Rs in crore
142,300
194000
150,000
200,000
250,000
68,97384,747
97,922
51,54262,217
74,088 80,500 88,500
50,000
100,000
02009 2010 2011 2012 2013
Gross NPAs Book Value of Assets transferred to ARCs
ARCs were created as a systemic response to address growing NPAs. However,recent experience suggests that while NPAs are accelerating, flow of Assets toARC h th b l kl tARCs has rather been lackluster.
Issues before ARCs (1/6)( )
Government of India had appointed a Key Advisory GroupGovernment of India had appointed a Key Advisory Group(KAG), consisting of all stakeholders for strengthening the functionaleffectiveness of ARCsThe measures suggested and their present status:
Recommendation To be effected through
Initiating Authority
Priority Present Status
NPA auction sale process & price Notification RBI/ IBA/ Essential Donep pdiscovery ARC
AssociationGradual write off of loss on transfer t ARC
Notification RBI Essential Awaitedto ARCPermission to acquire debt from other ARCs
Amendment / Notification
Govt of India/ RBI
Essential In process
Investment in SRs by insurance Clarification IRDA Essential Awaitedycompanies
Issues before ARCs (2/6)( )
Recommendation To be effected Initiating Priority Present through Authority Status
Mark to Market based on ARC price offer
Notification RBI Desirable Awaited
Broadening of Market by inclusion Amendment / Govt of Essential AwaitedBroadening of Market by inclusion of NBFCs
Amendment / Notification
Govt of India/RBI
Essential Awaited
Modification in FII investment Notification RBI/Govt of India
Essential Done
Removal of sub-limit of FII at tranche level
Clarification RBI Essential Done
Secondary Market making for SRs Amendment/ Notification
RBI/Govt of India
Essential AwaitedNotification India
Conversion of debt into equity Clarification RBI Essential Permitted in recent SARFAESI Amendment
Issues before ARCs (3/6)( )
Recommendation To be effected Initiating Priority Present through Authority Status
Issuance of Guidelines on Sale/Lease of Business
Notification RBI Essential Awaited
Restructuring Support finance Clarification RBI Essential AwaitedRestructuring Support finance-participation by investor
Clarification RBI Essential Awaited
Securitization of Assets Clarification RBI Essential Awaited
Pledged Shares-substitution Clarification RBI Essential AwaitedPledged Shares substitution Clarification /Notification
RBI Essential Awaited
Exemption from Takeover code Clarification SEBI Essential Awaited
Uniform Assignment Agreement Notification IBA/ ARC Essential Done Association
Allowing ARCs to go public Notification RBI/SEBI Desirable Awaited
Immunity for Nominee Directors Notification Govt of India Essential Awaited
Stamp duty payable on Assignment Agreement
Amendment in legislations
Govt of India Essential Awaited
Issues before ARCs (4/6)( )
Recommendation To be effected Initiating Priority Present through Authority Status
Priority to secured creditors over statutory dues
Amendment in legislations
Govt of India Essential Awaited
Reduction in bottlenecks in Various Govt of India Essential AwaitedReduction in bottlenecks in functioning of DRTs
Various initiatives / Guidelines
Govt of India Essential Awaited
Consent level for Security Amendment in Govt of India Essential Done enforcement actions ActSubstitution of ARC in place of lender banks
Amendment in legislations
Govt of India Essential Done
Registration of Assignment Amendment in Govt of India Desirable AwaitedRegistration of Assignment Agreement to be dispensed with
Amendment in legislations
Govt of India Desirable Awaited
Delegation of powers to officials below DM/CMM
Amendment in Act
Govt of India Essential Done
Issues before ARCs (5/6)( )
Recommendation To be effected Initiating Priority Present through Authority Status
Legal Forum for pursuing cases acquired from Coop Banks
Amendment in Act
Govt of India Essential Permitted through recentrecent SARFAESI Amendment
Modification of charge in respect of ‘dormant companies’
Notification Govt of India Essential Awaited
Transfer of financial assets from Co op Banks
Notification RBI Desirable Permitted throughCo-op Banks through recent SARFAESI Amendment
Income Tax Treatment of Trusts set up by ARCs
Notification Govt of India Desirable Awaited
Issues before ARCs (6/6)( )
Recommendation To be effected Initiating Priority Present through Authority Status
TDS on interest payments received from borrowers
Notification Govt of India Desirable Awaited
Income Tax benefits on provisions Notification Govt of India Desirable AwaitedIncome Tax benefits on provisions Notification Govt of India Desirable Awaited
Accounting treatment at Banks on sale of NPAs to ARCs
Clarification RBI Essential Awaited
Uniform Accounting Standards at Notification ICAI/ARC Essential InUniform Accounting Standards at ARCs
Notification ICAI/ARC Assn
Essential In progress
Constraint in effective delivery-legaly g
DRT/DRATs created to fast track cases involving secured creditorsDRT/DRATs created to fast track cases involving secured creditors face delay as
Posts of presiding officers and other officials remain vacant for monthsApplications for stay of action by secured creditors for security enforcement arepp y y yentertained by other courts including High Courts
as a matter of routineFor any objection raised by borrower against action by secured creditors, DRT isrequired only to examine whether the creditor has acted in due processrequired only to examine whether the creditor has acted in due processprescribed in SARFAESI Act
However, in many cases extraneous issues are taken up which cause delay
Security enforcement with assistance from District Magistrates andy gChief Metropolitan Magistrate also get delayed often
Different states follow different practicesRequests for security enforcement are not treated as priority by the Magistrates
Way forward*y
Going forward Four Institutional structures have to playGoing forward, Four Institutional structures have to playa more concerted & effective role in tackling themenace of growing NPAs
DRT/DRAT
ARC
CDR
CICCIC
*Based on Address of Dr K.C. Chakrabarty, DG, RBI at Bancon
All th t t d t kAll that you wanted to know…
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