Money & Banking

NARCL will have negligible short-term impact for banks: Kotak Securities report

Our Bureau Mumbai | Updated on September 18, 2021

Govt guarantee, aggregating ₹30,600 cr, to the security receipts to be issued by NARCL puts a 18% floor on recovery rate

The National Asset Reconstruction Company Ltd (NARCL),which is being put together by public sector banks and a few private sector banks to clean up their bad loans, will have negligible short-term impact as the upfront cash received is a smaller proportion and divided across banks, according to a Kotak Securities Ltd (KSL) report.

Government guarantee, aggregating ₹30,600 crore, to the cecurity receipts (SRs) to be issued by NARCL puts a 18 per cent floor on recovery rate, the report said.

The government guarantee on SRs can enable trading of these securities (that is converted into cash in secondary market).

“The upfront cash received, 15 per cent of the written-down value, will be reversed while the provisions for the balance (value of security receipts) are unlikely to be reversed even if it is fully provided.” said a team of six KSL analysts led by MB Mahesh.

As this cash is a smaller proportion and divided across public banks and a few private banks, the short-term impact is negligible, the analysts added.

They opined that larger release of provisions, if any, would be made as and when the cash is received on sale of these receipts or redemption of security receipts.

The analysts felt that banks are unlikely to reverse any provisions based on their discussions with these banks in the past on this topic.

They assessed that a 15:85 (cash: SR) structure implies that the ₹30,600 crore guarantee would translate to ₹36,000 crore of marked-down value of NPLs.

So, the ₹2 lakh crore of NPLs (non-performing loans) purchase value would imply 18 per cent recovery rate.

“Today, the NPL recognition and provisions cycle is largely complete with some of the largest bad loans already resolved.

“Banks have about 90-100 per cent (provision) coverage on these assets, implying there is no management incentive to delay decision making,”the analysts said.

The NPLs (written-off or otherwise) exchanged for security receipts are fully provided but the analysts don’t expect banks to reverse provisions.

Major benefit

The report emphasised that the major benefit of NARCL would accrue through faster debt consolidation, potentially leading to quicker decision making and better recovery rates.

Further, senior management bandwidth would be released on solving these problems, which can be channelized towards identifying fresh segments for growth that has been tepid in recent years.

Published on September 17, 2021

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