A better way out of bad loans

It is disappointing that the National Asset Reconstruction Company Ltd (NARCL), the bad bank promoted by GoI, has failed to pick up bad loans despite being in operation for a year. Broadly, this is also a reflection of the suboptimal performance of asset reconstruction companies (ARCs) in India. Reportedly, NARCL is now preparing to acquire 18 distressed accounts totalling ₹39,921 crore by October 31. The main reason for NARCL’s failure to close a single transaction so far is the mismatch in the pricing of loans. Lenders had rejected offers as the pricing was below their expectations. A more realistic pricing by NARCL will enable banks to sell bad loans and clean up their books.

NARCL’s valuation is based on the premise that the resolution of the stressed asset would take place towards the end of fifth year. It means applying a five-year discount to the asset (read: cost of holding the asset). That is not tenable for lenders. NARCL must revise the valuation of receivables for loans and the underlying securities on these loans. Bankers should also cooperate with the bad bank to expedite the sale of loans.

NARCL will acquire bad loans, paying 15% of the value agreed upon in cash and the balance as security receipts (SRs). Its affiliate, India Debt Resolution Company Ltd (IDRCL), will manage the assets and dispose of them. GoI will guarantee the difference between the face value of the SRs and the value realised from underlying assets up to a total of ₹30,600 crore. The twin resolution mechanism must work swiftly to help businesses revive and protect the productive assets of the economy. The need is also for an active debt market, from which ARCs can raise funds, via subprime bonds, to buy out bad loans.