Money & Banking

‘Essar Steel case proves why ARCs are a win-win for all’

Radhika Merwin BL Research Bureau | Updated on December 03, 2019 Published on December 03, 2019

Siby Antony, Chairman, Edelweiss ARC

The Supreme Court ruling in the Essar Steel case not only brings huge relief to banks, but also lays to rest several issues that have been delaying the IBC resolution process. Edelweiss ARC, the largest lender after SBI in the account, has represented nine banks from whom loans were acquired. In an interaction with BusinessLine, Siby Antony, Chairman, Edelweiss ARC and Chairman of Association of ARCs in India, the Essar Steel case shows how banks can ease their burden by offloading bad loans to ARCs. Excerpts:

How has the sale of bad loans to ARCs progressed over the last two years?

After the 15:85 structure was introduced in August 2014 (15 per cent upfront payment on the sale of bad loans to ARCs and security receipts (SRs) issued in respect of the balance 85 per cent), there was a temporary slowdown in the sale of bad loans to ARCs. This was due to the sudden three-fold jump in the upfront payment and capital scarcity of ARCs. But sales have picked up from FY17.

With the IBC in force, we are, in fact, seeing more banks looking to sell their bad loans to ARCs. ARCs have enhanced their capital, and many of them have tied up with large funds.

Banks need to spend a lot of time and effort in handling cases under the IBC and, hence, offloading bad loans to ARCs is proving to be a more efficient way of resolution.

More importantly, there has been a realisation among lenders about the realistic value of assets.

The Essar Steel case is a great example of how ARCs can be a win-win proposition for everyone. We had bought over the debt from nine banks to became the second-largest lender after SBI in Essar. We had bought over the Essar Steel account at 55 to 60 cents to a dollar under the 15:85 structure.

The 89 per cent recovery in Essar for financial creditors has been a big gain for both ARCs and banks. Hence, I feel, more banks will see the benefit in doing the sale under the 15:85 structure, and it will gain more acceptance.

But for that to happen, the pricing of loans at the time of sale has to be right….

Yes, that’s true. There have been some issues in the past. Before the 15:85 structure kicked in, the upfront cash payment requirement was just 5 per cent under the 5:95 structure.

Here, the pricing was unrealistic and recovery rate low. While there were some challenges on reaching a consensus with banks on the pricing front immediately after the implementation of the 15:85 structure, IBC has been a big game-changer.

The resolution and recovery under the IBC have helped set a realistic benchmark to arrive at the right pricing. The beauty of the 15:85 set up is that it is in the interest of both banks and ARCs to ensure maximum recovery.

Aren’t banks insisting on doing the sale through the cash route, given that the RBI had tightened provisioning norms

from 2018?

Yes, that has been a challenge. To avoid the additional provisioning burden, many banks prefer the cash route. But they lose out on any upside in the recovery, which they are slowly realising.

After the success of Binani Cement and Essar Steel, more banks may want to consider the SR route. Also, in many of the cases, banks have now already made high provisioning on the loans. Hence, doing the sale through the SR route may not require additional provisioning.

SEBI had allowed the listing of SRs, but initially, only qualified institutional buyers were allowed.

Are retail investors

now allowed to invest?

No. As of now only qualified institutional buyers are allowed, and that is a challenge. Essentially, it is only banks that can still trade in SRs. Widening the investor base will be essential as it would bring in more transparency in the pricing of stressed assets. Also, it will offer an exit route for banks sitting on substantial SR book. But I think it will take some more time for the regulator to open up the market, given that it is still nascent.

The government had allowed the sponsor of an ARC to hold up to 100 per cent and increased the FDI threshold to 100 per cent. But still most of the ARCs are capital-starved. Why?

Yes, you are right. Several steps have been taken to smoothen the fund flow into distressed assets in India. But still there are many challenges.

While the ARC infrastructure is a good vehicle for foreign institutional investors to route funds, ARCs do not have enough capital to catalyse large individual investments as the regulatory prescription of 15 per cent upfront payment is proving to be a hurdle.

We have taken up with the regulator for aligning the regulation with SEBI requirement in the case of an AMC sponsoring an alternative investment fund (AIF).

Here, the AMC has to bring in 2.5 per cent of the fund or ₹5 crore, whichever is lower, in those cases where original lenders exit the NPA on sale. ARCs can play the role of an asset manager in such cases.

You may be aware that foreign funds are seeking regulatory changes for enabling direct debt assignments to them without the intermediation of ARCs.

This might call for changes in the SARFAESI Act to bring foreign funds under the purview of the Act and stricter regulatory oversight similar to ARCs. Without these changes, direct assignments can create issues for the asset buyer and regulators.

Even ARCs active in the space face problems with documentation and security interest registration. We believe that ARC will be the most appropriate vehicle for foreign funds to invest in India.

Published on December 03, 2019
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