Under the twin structure, National Asset Reconstruction Company Ltd (NARCL) — the state-backed bad bank — acquires and aggregates bad loans from lenders while another organisation, India Debt Resolution Company Ltd (IDRCL), acting parallelly as a private sector entity, focuses on resolution of the non-performing assets for enhancing the value of the loans and finding a better suitor for the troubled borrowing company.
However, there is a growing feeling within NARCL that this exclusive arrangement between a public sector principal acting as an asset reconstruction company (ARC) and a private sector resolution agent is not proving to be the best deal.
The constraints of the twinstructure were indicated by officials of the National Asset Reconstruction Company Limited (NARCL) during an interaction with the finance ministry, two persons told ET.
“The Reserve Bank has given the ARC licence to NARCL. So, at the end of the day, even if IDRCL is engaged in resolution, it is NARCL which would still be responsible for the decisions taken. So, why have two organisations? Also, it means higher costs and an unwieldy structure. Many in the (stress asset) market had anticipated the problem at the time of inception, but it was then felt that decision making on resolution would be quicker in a private sector company,” said a senior banker.
Besides, a public-sector ARC, exposed to government audit and preferring safer options, may end up spending more on due diligence by paying high fees to external consultants than a private sector stress asset firm.
Natarajan Sundar, MD and CEO of NARCL, and IDRCL CEO & MD Avinash Kulkarni did not respond to calls and text messages while ET’s email query to a finance ministry spokesperson went unanswered till the time of going to press. The point regarding the shortcomings of the dual structure cropped up in the wake of NARCL falling way short of the targeted acquisition of loans. As against its self imposed target to buy accounts of `50,000 crore, it acquired Rs 10,387 crore loans from 3 accounts in FY23.
However, while multiple persons including insiders said that the shortcomings of twin structure were apparent , they were not aware of any imminent plan to integrate or merge the two companies.While the less-than-expected quantum of loan purchase may be partly attributed to the composition of the two companies and the inter-relation between them, sections think NARCL also loses out as it tends to pick up cases which it believes can be resolved in 5 years — the term during which the security receipts (SRs) issued by the company enjoy a sovereign backing. Similar to bonds, SRs are instruments which ARCs issue to loan-selling banks along with cash. The return on SRs and their redemption depend on the recovery of the underlying loans.
“Other ARCs may take longer bets but NARCL may target assets where it thinks resolution can happen within 5 years. Else, just before the close of the five-year term, the banks (holding the SRs) could invoke the government guarantee. Now, this may not be a simple process for NARCL which may face many questions from the government: how did they fix the loan price? Why was the realisation low? etc,” said an industry official.
The twin structure was not the original plan for the bad bank. Initially, it was proposed that NARCL would aggregate assets and function as a full-fledged ARC, and the sister institution would operate as an alternative investment fund (AIF) — a pooled vehicle akin to a private equity or venture capital fund. Such an AIF which would have raised funds from wealthy investors with higher risk appetite and infused capital into companies whose debts are acquired by NARCL. The ARCAIF combination exists in some of the private sector groups that are active in the stress asset market.
“Perhaps, such a structure would have been more effective. However, this was then rejected by the RBI which did not want the AIF (which is not regulated by the central bank) taking key decisions,” said another person aware of the current issue.