Focus on revival of units, not asset-stripping

There has been a recent surge in banks selling off their distressed assets to asset reconstruction companies (ARCs). There is a general perception that this has been spurred mainly by the Reserve Bank of India (RBI) relaxing some provisioning norms.

But this is open to question. Banks are better equipped in terms of manpower, knowledge of the borrower and knowledge of security (assets). On the other hand, ARCs deal with the borrowers for the first time.

Restructuring of loans, on the condition that the promoters infuse some capital, can be done without banks incurring much loss. Banks can recover the losses later once the company turns around and/or the economic conditions improve. That has been the time-tested practice in the country. But none of the public sector lenders are seen doing this nowadays.

The fear factor What I observe is that on account of the fear psychosis of an investigation later on by an outside agency, the banks prefer to adopt ARC route. It was expected that all ARCs will have sufficient funds to takeover bad debts and they will develop a mechanism to resolve the same within a shorter timeframe (currently, the time is 8 years, which is too long). The aim was to protect the interests of banks, ARCs and other stakeholders.

However, the majority of ARCs are interested in getting assigned debt that is backed by substantial fixed assets. At the same time, banks are also keen to retain such assets as they expect to recover more from such borrowers themselves. That way, both of them are fighting for the same asset class.

Unfortunately, ARCs are supported mostly by real estate barons, whose main aim is to grab real estate assets rather than initiating any purposeful restructuring or recycling of assets.

So, ARCs should be told that once they get the debt assigned from banks, they should reappraise and re-examine the viability of the project with a reasonable internal rate of return , over a period of 10-15 years. If the unit is found viable, the lenders should evolve a proper monitoring mechanism by appointing financial experts. This will help recycle the NPAs.

Once the project is reappraised, the assets should be classified as ‘standard’ and the borrower and the banks that were not part of the earlier lenders’ group should also be given an opportunity for further funding (the company and promoter should keep on reinvesting the proceeds of the business).

Help at hand This will go a long way in creating competition and further reducing bad debts. Besides, these steps will help create more employment opportunities and revenue for the Government.

This process will save ARCs from becoming bankrupt due to lack of enough liquidity and/or their inability to resolve NPAs apace.

The State Bank of India chairman’s observations in favour of entrusting the management of industries to outside agencies with full powers, as was suggested in the case of Bhushan Steel, to supervise the day-to-day operations till the promoter-directors infuse substantial stake into the company, is appreciable.

Instead of the bank appointing a nominee, the chairman or MD of the bank be appointed as the chairman of a sick company to run its operations. That will be a real test and this would protect the interests of all stakeholders, as in the case of Satyam Computers.

Till such time, the existing promoters should not be allowed to access bank funds for any other ventures. This will create a deterrent. Therefore, an enabling provision has to be made in the Companies Act, Sarfaesi Act and ARC Act — that as soon as the assets are assigned in favour of ARC, the existing board and shareholder’s powers are suspended and will be revived only when the promoter directors bring in substantial funding.

At that juncture, ARCs should reassess the viability of the project after considering substantial reduction in debt. In other words, if such portion of the debt is scaled down, if reasonable IRR concept is introduced, the purpose of revival of the unit is beneficial, rather than ARCs looking for fixed assets as real estate ventures.

For this, a framework for ARCs has to be stipulated. ARCs should be encouraged to engage professionals not only for resolution of bad debts, but also for running the units.

This will really serve the intention of the Government for the revival of sick units as well as resolving the problem of bad debts. The resolution of bad debts itself should not start from the day it becomes a NPA, but it should be monitored during the implementation of the project.

After initiating these efforts, ARCs and banks should invite expression of interest for takeover of these assets as a going concern.

This will also create huge value for the assets of the defaulting company.

Till such time, promoters should not be allowed to interfere. This will also give an opportunity to make good all the sacrifices made by the banks and the Government.

Recent guidelines of the RBI which insist on takeout financing route will also help the cause of revival of sick units.

The writer is a former CMD of Corporation Bank

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