Asset Reconstruction CompaniesAsset Reconstruction …Indian Banking -Perspective zRBI reportRBI report- Trend and Progress of Banking 2013Trend and Progress of Banking 2013 released

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


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



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



Priority to secured creditors over statutory dues



Reduction in bottlenecks in Various Govt of India Essential AwaitedReduction in bottlenecks in functioning of DRTs

Various initiatives / Guidelines


Consent level for Security Amendment in Govt of India Essential Done enforcement actions ActSubstitution of ARC in place of lender banks


Govt of India Essential Done

Registration of Assignment Amendment in Govt of India Desirable AwaitedRegistration of Assignment Agreement to be dispensed with


Govt of India Desirable Awaited

Delegation of powers to officials below DM/CMM

Amendment in Act

Govt of India Essential Done



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



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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Asset Reconstruction CompaniesAsset Reconstruction …Indian Banking -Perspective zRBI reportRBI report- Trend and Progress of Banking 2013Trend and Progress of Banking 2013 released