PSU banks seek RBI oversight on IDRCL for smooth NPA resolution
Under the unique twin-company structure, National Asset Reconstruction Company Ltd (NARCL) – the bad bank in which the majority shareholding is with public sector banks – would buy bad loans from commercial banks, while India Debt Resolution Company Ltd (IDRCL), where private sector institutions would hold 51% equity, would focus on the resolution of the loans purchased.
“Public sector banks want the RBI to ‘recognise’ IDRCL. Since IDRCL will be responsible for running complex resolution processes, it may come across legal challenges. These can be best handled if the entity has a regulatory recognition,” a person familiar with the ongoing discussion between RBI and banks told ET. “However, RBI has certain reservations about this because existing regulations have no provisions for such a structure,” he said.
Under the present rules, an asset reconstruction company (ARC), such as NARCL, which takes over and holds the stress assets, is also responsible for the resolution. All ARCs are regulated by the central bank.
“Banks would ideally want RBI to also regulate IDRCL (which is not an ARC), and consider it integral to the overall bad bank proposal. Even if NARCL has the final say on the resolution path, it is felt that IDRCL should be recognised by either RBI or (capital markets regulator) Sebi,” said a banker.
An RBI spokesman did not comment on the matter. Sources said banks are trying to figure out the issue with the RBI, and the subject may be discussed this week between senior bankers and officials of the department of financial services.
The proposal of an ARC functioning in tandem with an asset management company (that manages and restructures non-performing assets for a fee) was proposed in the last Union Budget.
While some of the bankers and ARC officials have questioned the need for a separate resolution entity, it is felt that a private sector entity – concentrating on resolution and run by people with a different mindset and free from the constant vigil of central government agencies – would help the bad bank take off faster.
“Being the first of its kind proposal, PSU banks (the shareholders of NARCL), probably out of abundant caution, want the overall mechanism to have some regulatory oversight. But, strictly speaking, it is not required,” said an official with an ARC.
The questions that crop up are: Will IDRCL, which would act like an exclusive advisor to NARCL, function like any other consultant? Or, would it have the power to cut deals to turn around a borrower, bring in new management, or sell off fixed assets?
NARCL would function like any other ARC, which pays at least 15% of the deal amount in cash to banks (selling loans) and the balance as ‘security receipts’, which are similar to bonds and have a life of eight years.
For all the latest Business News Click Here