SOURCE :19 May 2010, 0017 hrs IST,Rajiv Ranjan,ET
Our asset reconstruction structure is unique; no other country operates a model of tightly regulated private sector companies engaged in the business of unlocking value from non-performing assets (NPAs) like we do. Why such a denouement for a unique dispensation like ours, then?
Because, a flawed implementation of a asset reconstruction company (ARC) model has resulted in the focus being shifted from unlocking value to ‘solving’ banks’ NPA problem. The key issue for ARCs is not the asset base but recovery and the time-frame within which it is made.
The performance on this front is agonising — at the end of six years of operation, the combined recovery of all ARCs works out to 31.9% of the acquisition price paid. Clearly, this points to a systemic logjam that needs to be tackled.
The logjam is on account of legal infirmities, legacy issues and certain bank practices but the more fundamental question that we need to ask is: Is ARC operation unlocking value for the economy the way it can and should? The simple answer to that question is ‘no’.
Garbage disposal cannot be the main role for ARCs, enforcement agents can do that as well, if not better.
The real value from NPAs will get unlocked only if ARCs do two things: one, tackle recalcitrant borrowers (that’s what Sarfaesi, or The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, was supposed to be all about) in order to make good recovery from NPAs that still have value; and two, rehabilitate revivable sick cases. ARCs have not resolved too many cases of the first variety and, as far as the second is concerned, they have not even scratched the surface.
There is confusion galore as two sets of RBI guidelines prescribe two different standards for determining the price at which banks should sell their NPAs — one for sale to ARCs (‘reasonably estimated realisable value’, or current market value – 2003 Guidelines for Sale to ARCs) and another for sale to banks (‘economic valuation of estimated cash flows’, or present value of expected cash realisations in future – 2005 Guidelines for Sale to Banks in Cash).
The 2003 guidelines ignored time value of money perhaps because, at that time, it was expedient to let banks ‘solve’ their provisioning problem by selling their NPAs to ARC at a price higher than warranted against issue of ‘security receipts’ (SRs).
In the absence of ‘fair practices’ guidelines, officials in the PSU banks-dominated banking system view sale of NPAs to ARC as a huge ‘risk’ — fraught with the dangers of a ‘vigilance’ probe. The logjam is complete: an ARC can submit cash bid matching the bank’s ‘reserve price’ only if it is willing to book a loss.
In order to break the logjam, following steps need to be taken:
First and foremost, we must put in place a mechanism so that banks are forced to get rid of their NPAs after a certain holding period — of, say, two years.
Second, Sarfaesi Act must be amended to confer extra powers on ARCs so as to instill responsible behaviour on the part of recalcitrant borrowers.
Third, RBI should issue guidelines covering ‘one-on-one deals between banks & ARCs for OTS and rehabilitation cases’, ‘auction and due diligence process’ (so that a one-sided application of market mechanism is avoided), ‘fair value’ (stipulating that ‘reserve price’ be computed based on: one, valuation of physical assets on ‘strip sale’, rather than ‘going concern’, basis; and two, present value of expected future realisations), inter-se transfer of debt (allowing such transfer for rehabilitation/ revival and debt aggregation purposes), ‘OTS payment by an ARC, on borrower’s behalf, as an investor’, etc.
Finally, the proposed Financial Sector Legislative Reforms Commission should be charged with the responsibility of mediating between ARCs, banks and the regulator in order to reform and reinvent asset reconstruction.
There is a unique opportunity for partnership between PE funds and ARCs, since the former have expertise in handling equity and the latter in handling debt. Investing funds together in a rehabilitation case would make sense because an ARC can also add value as a rehab expert and a debt aggregator with Sarfaesi powers, including the power to takeover management of the borrower’s business.
(The author is the president and CEO of Reliance ARC. Views are personal)
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