RBI, SEBI strike right note on stressed assets

Rouhin Deb | Updated on July 19, 2020

Secondary market for bad debt, along with relaxed open offer and preferential issue norms for stressed firms can curb NPA burden

As the economic stress due to the pandemic deepens, banking is surely going to be one of the most affected sectors, due to heightened default in payments One element often discussed in this context is the new arrangements that SEBI and the RBI are making to ease the pressure on the banking system Many banking and economic experts are salivating at the prospect of the government releasing more fiscal stimulus into the economy through various methods like printing more money or by borrowing. However, this may not be a good idea.

For the government to borrow, the market should have savings. The available data show that savings of the domestic households have taken a hit since March end and are not enough to fund government’s borrowing. It is also not a good idea to indirectly monetise money by printing notes against government bonds to the RBI.

The government, therefore, seems to be taking a third route. With regard to the stimulus announced, it is quite clear that the government is looking at the Covid-19 scenario more as an opportunity than a threat, and moving itself towards taking landmark reforms in sectors that entangled in regulations. SEBI and the RBI, for example, have taken several steps to address the issue of bad loans that has been present for some time.

Buyer relief

In a recent announcement, SEBI has allowed preferential offer of shares in stressed companies to the new owner at a two-week average, as against the formula that considered the moving average of six months. This could allow potential buyers to purchase existing assets at a much fairer value than it was possible with the earlier regulation.

Second, SEBI has also said that in the case of takeover of a stressed or defaulting company, an open offer is not required from the promoters. This seems to be a huge relief for the prospective buyers. These steps are extremely pragmatic towards recapitalising stressed companies.

Amidst the pandemic, which is far from nearing an end, these steps will be beneficial in clearing up the existing stock of NPAs and also reduce the fresh list of defaulters that would have otherwise popped up as a result of weak economic activity.

Separately, the RBI also has issued a new rule which will make it easier for banks to sell loans to alternate investment funds. These new set of reforms, along with the existing IBC (Insolvency and Bankruptcy Code) and NCLT (National Company Law Tribunal) aim to reduce NPAs.

The new reforms will allow a fund to participate in not just buying, but also providing recapitalisation funds to stressed firms at different levels. The problem potential investors had initially was with the prices of shares of the companies which had NPAs or were insolvent. They traded at unrealistic levels, making it difficult for buyers to make an offer, which will not be the case with the new resolution process, which does away with the open offer requirement..

In the new resolution process, SEBI has clearly defined the parameters for companies to be assigned the stressed assets. Relaxations pertaining to preferential shares and open offers are not open to misuse by promoters or those declared insolvent or wilful defaulters.

The new parameters will benefit bankers. Resolutions can be brought in much faster, helping these accounts from turning into NPAs. The RBI draft on June 16 tries to create a secondary market for existing loans to be traded as it mentioned “any regulated entity can purchase these non-performing loans”, which gives room to everyone from ARCs (Asset Resurrection Companies) to FPIs (Foreign Portfolio investors) to come in and purchase these loans.

Sellers’ concerns

Apart from taking steps to address the buyer-side concerns of stressed assets, SEBI has also tried to take steps to address the seller side of stressed companies. A new amendment specifically for the Covid-riddled FY21 has been passed, wherein an acquirer, if he holds more than 5 per cent but less than 10 per cent, can make a preferential offer without having to make a public offer. This helps the promoters of the company expedite the sale of distressed assets.

At the end of the day, though the above-mentioned steps are welcome and pave the way for banks to ease their bad loans, there is need to do more on the seller-side concerns of the bad loans.

A bad bank is a good proposition which deserves due attention, because it solves the three most pertinent problems. It aggregates bad debt and brings it under the purview of one decision-maker, who possibly can also be good asset manager. This will help in better management of bad loans.

However, the present package paves the way for getting rid of stressed assets ,for which SEBI and the RBI deserve due credit.

The writer is a development economist

Published on July 19, 2020

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