Asset Reconstruction Company_Section Z_Final

8/7/2019 Asset Reconstruction Company_Section Z_Final

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Presented by: Group 12, Section ZKaran Soni (91085)

Anubha Rustagi (91126)

Komal Soni (91138)SudhanshuArya (91158)

SARFAESI Act,2002 defined non- performing

assets as an asset or account of a borrower,

which has been classified by a bank orfinancial institution as sub-standard,

doubtful, or loss assets in accordance and

guidelines relating to asset classification bythe RBI.

STANDARD ASSETS: These are good and

performing assets.

SUB-STANDARD ASSETS: an asset is

considered bad when borrower has defaultedon principal and interest repayment for morethan one quarter or 90 days.

DOUBTFUL ASSETS: they find their way

from sub-standard assets after 18 months in

Indian context against 12 months under theinternational norms.

LOSS ASSETS: An asset which has beendeclared by the bank or auditors or by RBI oninspection.

Interest or principal (or installment) isoverdue for a period of 90 days or more from

the date of acquisition or the due date as percontract between the borrower and theoriginator, whichever is later;

Interest or principal (or instalment) is overduefor a period of 90 days or more from the datefixed for receipt thereof in the planformulated for realisation of the assets

Interest or principal (or installment) is

overdue on expiry of the planning period,

where no plan is formulated for realization of the

Any other receivable, if it is overdue for a

period of 180 days or more in the books of the SC or ARC.

In India the only NPLs which may be sold are:

non-performing assets, being loans where there

has been a default for at least 90 days;Or

standard assets in circumstances where 75% of the face value of the loans to the relevant debtorhave been classified as nonperforming and 75% byvalue of the lenders have agreed to sell their loansto an ARC.

Provision Coverage Ratio

Technical write-offs

Security Receipts

Debt recovery tribunal

ARCs are created to manage and recover

NPAs acquired from the banking system

ARCs act as a bad bank by isolating NPAsfrom the balance sheet of bank/FII and

facilitate the bank to concentrate innormal banking activities

Centralisation of bad loans in one or a few hands andtherefore obviously more clout

It is possible to give special legislative powers to a

few AMCs rather than to each bank Banks are left with cleaner balance sheets and do

not have to deal with problem clients. Regularbanking relations with the group are not affected.

Because it deals with a larger portfolio, it can mix upgood assets with bad ones and make a sale which ispalatable to buyers.

It is easier to do a capital-market based funding foran AMC than for the banks themselves.

ARCIL acquired 20 assets aggregate principal

outstanding of Rs 40 crore

The small asset portfolio scheme March 2005 : recovered cash of Rs 6.5 crore

(45 per cent of the acquisition price of theportfolio)

Arcil acquired bad debts worth :

Rs5,051 crore from State Bank of India,

Rs2,848 crore from IDBI Rs1,290 crore from Punjab National Bank

Bank of India : acquisition of non-performing

assets worth about Rs250 crore.

Rs11,209 crore from ICICI Bank ( majorly badhome loans )

Central Bank of India and Punjab and SindBank, announced sale of distressed assets, a

staggering ̀ 3,500 crore in the case.

Banks have become more conscious of bad

loans and are speeding up recovery

mechanism Deep gap between what banks expect in

return for NPAs and what ARCs are willing tooffer

Banks capacity to hold on to bad loans haveimproved

RBIs one time dispensation to banks to

restructure bad loans in wake of global

financial crisis RBIs permission to allow for technical write-

offs for the calculation of provisioningcoverage ratio

In 1980s, U.S. used government sponsored ARC -Resolution Trust Corporation (RTC) to overcome thriftcrisis

In the early 1990s Mexico and Sweden demonstratedsuccessful use of ARC mechanism

Korea used KAMCO as the nodal agency-securitization and joint venture route

In Malaysia, Danaharta is the centralized ARC set upat the instance of Government- restructured andconsolidated the banking system

In Taiwan, the ARC model envisages liquidation of assets through the sale of assets to investors

The problem of recovery from NPAs, in theIndian banking system, was recognized by

the Government of India (GOI) as far back asin 1997, when the "Narasimhan Committee"was appointed.

The Narasimhan Committee Report

mentioned that an important aspect of thecontinuing reform process was to reduce thehigh level of NPAs as a means of bankingsector reform.

It was expected that with a combination of

policy and institutional development, new

NPAs in future could be lower.

However, the problem of a huge backlog of existing NPAs remained.

The Parliament of India enacted and passed

the securitization and Reconstruction of

Financial Assets and Enforcement of SecurityInterest Act, 2002, (the Act) to regulate

securitization and reconstruction of financialassets and enforcement of Security Interest

(as defined in the Act) and for mattersconnected therewith.

Asset workout departments or units of banks

Bank-owned subsidiaries or affiliated

companies Private companies, and

Government owned asset managementagencies

An agency is sponsored by government whichacquires and resolves the bad assets

It can also have other operations like depositinsurance or bank recapitalisation

Moreover in this model, centralisation of NPAprovides effective asset packaging and marketing,

ensuring consistency and transparency within the ARC In addition, the risk of decrease in sale value of

assets by the competing bank based ARCs is alsoreduced

A bank based model has two approaches:

workout units

bad banks

RapidDisposition

Agency

Immediate selldown of debtto third party

investors

Risks andrewards

transferred to

the investors

DebtResolution

Agency

Focus on assetmanagementand resolution

Risks andrewardsretained by

banking system

SBI IDBI ICICI

ARCIL ABC Textiles

Step I

Step 2

Step 3

Step 4

Overview: SPIC had invested around Rs 165 crore as equity in the Jordanianventure, which mines rock phosphate and produces phosphoric acid.

The $170 million Indo-Jordan Chemicals Company is a joint venture between

SPIC, JPMC and the Arab Investment Company (TAIC)

ARCIL has undertaken a massive clean up of the finances at SPIC. It has soughtthe auctioning of SPIC's fifteen properties to raise funds

SPIC owes its creditors close to Rs 2,900 crore

Objective: To restart the closed fertilizer plant of SPIC Action Undertaken by ARCIL: It has signed a memorandum of

understanding (MoU) to sell the 52.5% stake in Indo-JordanChemicals Company (IJCC), a subsidiary of Spic for around Rs.350crores

The joint venture partner Jordan Phospates Mines Company

bought back the stake held by SPIC

Money raised from this exercise would be utilised towardsrestarting the fertiliser plant in Thoothukudi, in south Tamil Nadu

SPIC had mandated investment banker Rabo Bank to find a suitor

for the stake in IJCC and was expecting Rs 400 crore to Rs 500crore from the sale.

ARCs are empowered to take the followingmeasures for asset reconstruction: Take possession of secured assets

Sell or lease a part or whole of the business of theborrower

Change or take over of the management of thebusiness of the borrower

Rescheduling the payment of debt payable by theborrower

Settlement of dues payable by the borrower

At present there are 13 companies operating

as asset reconstruction companies each

trying to grab a bite of the scarce business. Major names:

Reliance Asset Reconstruction Company Ltd.

India SME Asset Reconstruction Company Ltd.

Edelweiss Asset Reconstruction Company Ltd.

First to commence business in India ICICI Bank, Karur Vysya Bank, Banks that have shareholding in ARCIL:

Karnataka Bank Citicorp (I) Finance SBI IDBI PNB

HDFC and some other banks ICICI bank is the largest seller of bad loans to ARCIL

followed by SBI and IDBI Acquired INR 12000 Cr worth NPAs in FY10

RealizingNPAs

Settlement withpromoters and strip sale

of assets

M & As

Various otherresolution strategies

DebtRestructuin

Sale of borrower companys

business/assets

Settlement Restructuring

Souce: ARCIL

Rating based on recovery potential of SRs:

Value of the underlying collateral

Expected time to recovery

Fitch's NPA Security Receipt Ratings (NR) are issued on ascale of 'NR1(ind)' (highest) to 'NR6(ind)' (lowest)

With 'NR1' being assigned to SRs with prospects of collection

more than 150% of the face value of the SRs, and 'NR6'assigned to SRs whose prospect of collection is 0%-25% of the face value of the SRs

Engaged in the business of knitwear Total principal debt of Rs 18 crore. ARCIL acquired entire debt in the company

Resolution : restructuring with the existing management

conversion of a part of the debt into equity. Arcil has stipulated earn-out clause on a portion of

this equity.

Besides, Arcil has pledge the promoters shares. Arcilhas recovered more than 12 per cent of total dues andexpects to meet its acquisition price and earn areasonable return on present value basis.

Engaged in the business of laminated tubes Total principal debt of Rs 374 crore. ARCIL acquired about 46 per cent of total

debt in the company Resolution :

creation of multiple maturity buckets for

repayments to lenders based on varyingrepayment tenor and linked sacrifice.

The lenders have to choose the bucket based ontheir requirements.

Acquisition

Price risk

Quality of loan risk

Management

Collateral deterioration

Legal Risk Sovereign Risk

Servicer performance risk

Financial guarantor risk

Credit risk

Prepayment risk

Variation of 7 to 100 percent in valuation Reasons for variation:

Asset Quality declines in proportion to theamount of time they stay in the system

Market Value of Collaterals

Legal Fra

mework and Resolution Methods -Holding costs are directly proportional to the time

required to exit (eg: KAMCO, TAMC)

Account information and data collation

Base: estimating a DCF on all expected net

cash flow from the loan through workout to

performing status, or from underlyingcollateral if the loan is liquidated

3 Major Models:

Derived Investment Value Model

Estimated Return for Secured Non PerformingAssets (ERSNA) Model

LAMM Model

Clean exit: Exit by cash

Exit through SRs

Approval sought for consistency in valuationunder both options

Biggest success of ARCIL

Mid 1990s

The company expandedmassively

2000-03

Could not sustain the growth

Erosion of networth by 50 %

Default in payments

Birla had a debt of 326 crore ,

ajor lenders wereB

ank of India, Union

Bank, UC

ank of B

aroda and StateB

ank of Saurashtra.

The net worth was eroded by almost 100 % due to accumulated losses

Acquisition of financial assistance by ARCIL

BVXL has also divested its other subsidiaries Masuzawa Punjab silk and VXL Technologies

The proceeds were to be used to pay off loans that had been transferred to the division.

BVXL's entire shareholding in OCM India was sold to US buy-out firm, WL Ross, for about Rs 170 crore.

Loans worth Rs 160 crore were transferred to the division.

the Amritsar facility was carved out into a separate division, OCM India, as a 100 per cent subsidiary.

Long-term debt, even after the restructuring initiatives, however, remains at about Rs 150 crore.

Post-conversion and the carving out of OCM India, the share capital of the company stands reduced to

Rs 43 crore from about Rs 100 crore.

About Rs 25 crore has been converted into equity.

About Rs 50 crore worth of debt will be paid off through the disposal of non-core assets, which havebeen allocated to a separate investment division.

It exited from its joint venture with Dormeuil Freres of France end of September.

Converted the debt to equity and held 54 %

shares of the company

Other 2 arms were put on operation as self liquidating vehicles

From April 2008, Birla VXL changed its name to Digjam.

Arcil maintained an exit clause as part of the takeover leaving it free tosell shares in Digjam.

On March 4 and 5, 2010 , Arcil through a series of open markettransactions executed on the BSE and NSE has sold a total 55 lac sharesat an average price of Rs 12.51, netting around Rs 6.88 crore in theprocess.

In October 2010, ARCIL sold another 352,000 shares at Rs 11.56

Pricing issues

Issue of pricing on a realizable value on assets

Book value transfer will result in huge losses

Market price transfer will aggregate problems

Debt aggregation Working Capital loans without Collateral , Value is negligible

Public banks not much keen on sale of NPA s Speed up the recovery process

Transparent activities to ensure bidders participation

The issue of whether or not ARCs can takeSARFEASI action without the approval of BIFR isstill undecided and pending before the Supreme

Court, though High Courts have taken diverse viewson the same.

It must have Operational Independence andsufficient Authority

Fiscal Incentives for ARC Exemption from Stamp duty ARCs should not be compelled to take over bad

asset higher than the realizable value. Independent board should represent both bank and

Govt. on ARC Accountability and transparency

Sale of assets acquired by ARCs

Development by ARCs of an active secondary

market for acquired assets Reduction of NPAs in current portfolio of

selected/target public sector banks and otherfinancial institutions

Restructuring plans for weak public sectorbanks and other financial institutions

Thank You!

Asset Reconstruction Company_Section Z_Final

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