Raghuram Rajan to meet ARCs, PE firms, banks to discuss stressed assets
The meeting agenda's could include looking for ways to encourage greater participation of PE funds in resolution of distressed assets as the ARCs have been unable to attract a lot of foreign capital
Reserve Bank of India (RBI) governor Raghuram Rajan will meet with representatives of asset reconstruction companies (ARCs), private equity (PE) firms and banks on Wednesday to discuss ways to improve the management of distressed assets, said two persons aware of the meeting.
“While the agenda for the meeting has not yet been disclosed to us, the idea is to broadly discuss the funding and sale of stressed assets in the system," said one of the persons quoted above, requesting anonymity.
According to the second person quoted above, the agenda could include looking for ways to encourage greater participation of PE funds in resolution of distressed assets as the ARCs have been unable to attract a lot of foreign capital.
“The main reason a lot of PE players have stayed away from the bad loan market in India is because the banks are not always transparent with the stress involved in a given asset. They are unsure if they would be able to make much difference once they buy into it," the second person said.
RBI has confirmed the meeting.
ARCs in India have been struggling to raise enough capital to fund their bad asset buys after the banking regulator made it mandatory to make an upfront payment of 15% of the net asset value from 5% earlier. The new rules came into effect in August 2014.
With the rise in the cash component, the net worth of ARCs was adequate to buy only ₹ 20,000 crore of stressed assets, which is a very small part of the overall non-performing assets in the banking industry.
Capitalization of all the ARCs put together adds up to around ₹ 3,000 crore, according to a November 2014 report by Alvarez and Marsal (A&M), a firm that gives turnaround services to companies going through financial stress.
Additionally, concepts such as PE-sponsored distressed asset firms and vulture funds have also not picked up in India.
“The primary reasons that special situation funds have not deployed significant capital in India is a slow process for debt aggregation and valuation expectation mismatches between banks and ARCs. There is no fixed mechanism to ensure that the ARC acquiring a large asset obtains a majority of the debt which would aid in swift and successful restructuring," said Nikhil Shah, managing director, A&M India.
Another issue is that a new investor is not given superior rights to the borrower’s cash flows and collateral, Shah said.
Stressed assets, which include bad loans and restructured assets, across Indian banks rose to 11.1% of total advances in March from 10.7% in September, RBI said in its financial stability report.
RBI, which has consistently spoken of the need for banks to be proactive and aggressive in tackling defaulters, has introduced a raft of new rules to ensure early recognition and recovery of bad loans.
In the framework on revitalizing stressed loans, released in January 2014, the central bank said external agencies such as ARCs, PE firms and large non-banking financial companies (NBFCs) with proven expertise in resolution or recovery of stressed assets would prove to be essential in the process of resolving bad loans.
In the guidelines, the regulator noted that such agencies would be allowed to participate in bidding for bad assets from banks. RBI would also negotiate with the government to allow PE firms and large NBFCs to have authority under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SarfaesI) Act, on a selective basis to deal with specific assets.
“Appropriate incentive structures may be built so as to provide greater role to PE firms and other institutions in restructuring of troubled company accounts," the central bank had said in its guidelines.
RBI had also stated that such firms could be expected not only to bring additional funds for restructuring, but also bring in expertise for management of the business unit in question.
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