According to a source familiar with the situation, the management of India's bad bank is considering the modalities of how much lenders will have to pay as a yearly charge in exchange for managing their toxic assets.
“We're nearing the end of the management fee negotiations. The fee will be determined by the amount of government guarantee that the National Asset Reconstruction Co. Ltd (NARCL) receives. A guarantee fee would have to be paid to the government depending on the value of the guarantee," said the person mentioned above.
Lenders sell troubled loans to asset reconstruction companies (ARCs) at a discount, either for cash or a combination of cash and security receipts. These receipts can be redeemed once the ARC has recovered the loan. Apart from that, ARCs incur an annual asset management fee of 1.5-2 percent of the asset.
The Indian Banks' Association (IBA), which has been tasked with putting up the bad bank, has estimated the government guarantee at approximately Rs.31,000 crore. The plan is for NARCL to buy problematic loans for 15% cash and the balance 85% in government-guaranteed security receipts. According to the individual, the company has now met the Reserve Bank of India's minimum capital requirement of Rs 100 crore (RBI).
NARCL had received Rs.74.6 crore from a group of eight public sector banks—Canara Bank, State Bank of India (SBI), Union Bank of India, Bank of Baroda (BoB), Punjab National Bank (PNB), Bank of India (BoI), Bank of Maharashtra, and Indian Bank—according to an earlier equity subscription statement dated 4 August. “Since then, we've been able to secure additional funding from lenders. More banks, both public and private, are in the process of receiving internal permissions, according to the source.
The regulator stipulated in April 2017 that ARCs have a minimum net owned fund of 100 crore by 31 March 2019. The RBI stated that the guideline was developed in light of the increased role that ARCs are expected to play in resolving stressed assets. Until press time, an email submitted to the IBA had gone unanswered. The NARCL, which was established on 7 July is supposed to be the solution to India's rising bad debt problem. Banks would first transfer to the NARCL 22 bad loan accounts totalling Rs. 89,000 crore. The total amount of bad loans that will be transferred in tranches is expected to be around Rs.2 trillion.
In the meantime, lenders are hunting for purchasers for their ARC holdings in order to free up funds for NARCL. PNB sold its entire 10.01 percent share in ARCIL, one of India's oldest ARCs with assets under management around Rs 12,000 crore, in February. Following suit, private lender IDBI Bank has started seeking a bidder for its 19.18 percent holding in ARCIL.
Comments