Govt may allow higher foreign play in bad asset business

An FII may be allowed to pick up 49% in a bad asset bought by an ARC from a bank from 10% earlier.

Aveek Datta.

Mumbai: The government may raise the level of foreign direct investment, or FDI, in asset reconstruction companies (ARCs) and allow foreign institutional investors, or FIIs, higher investment limits in security receipts (SRs) which such companies typically issue against a pool of bad assets.Both proposals are critical to boost the asset reconstruction business in India at a time when bad loans in the banking system have been on the rise in a slowing economy.

A long-standing demand of the sector, the changes could be part of the government’s budget for 2012 to be presented in Parliament by finance minister Pranab Mukherjee on 16 March.
The finance ministry is considering a proposal to hike the maximum permissible stake a single FII can pick up in a bad asset bought by an ARC from a bank to 49% from 10% earlier, according to two people familiar with the matter. The maximum collective stake that multiple foreign entities can hold in such an asset may also be increased to 74% from 49% earlier, they added. None of them wanted to be identified.
FDI in ARCs can also go up from 49% to 74%. Even though there is no sub-limit within the 49% permissible limit, typically the Reserve Bank of India (RBI) does not allow one single entity to hold more than 10% stake in an ARC currently.
Barring Asset Reconstruction Co. (India) Ltd (Arcil), India’s oldest and largest ARC, none of the other 12 companies in the sector has been able to acquire substantial bad assets from banks due to paucity of funds.
“An advisory group comprising executives of asset reconstruction companies had made a recommendation to the government (for raising the limit of foreign investment),” said Birendra Kumar, managing director and chief executive of International Asset Reconstruction Co. Pvt. Ltd. “It will be a positive development if the government were to allow this.”
RBI and the finance ministry have been discussing both the proposals.
Typically, ARCs set up separate trusts to acquire individual assets. These trusts issue SRs against the bad assets bought. The SRs are bought by banks themselves as qualified institutional buyers, or QIBs, as well as other investors. Banks do ask for upfront payment in cash, too, instead of SRs.
There are several regulatory restrictions put by RBI on the source of funding that ARCs can tap. Out of the available sources, banks, notified financial institutions and non-banking financial companies do not lend much to ARCs. Another source of liquidity for ARCs could have been domestic funds, but there are a very few in India focused on distressed assets.
P.H. Ravikumar, managing director and chief executive of Invent Assets Securitisation and Reconstruction Pvt. Ltd, said that if there were more funds from foreign investors at the disposal of ARCs they would be able to bid for more assets.
“Over the last two years, all the ARCs put together haven’t managed to acquire assets worth more than Rs. 1,000-2,000 crore,” Ravikumar said. “If the limit of foreign investment is increased to these limits, we can buy assets to the tune of Rs. 5,000-7,000 crore.”
Since these foreign investors are minority shareholders at present, they don’t take an active part in the revival of assets. The situation may reverse if they were allowed a sizable stake, Ravikumar added.
ARCs will play a crucial role in reducing the burden of bad loans on banks, at a juncture where non-performing assets (NPA) in the banking system have grown rapidly.
A 6 February Mint analysis of 34 listed banks that had announced their December quarter results showed that their gross NPAs had grown to Rs.76,644 crore, a 30.51% year-on-year increase. The analysis didn’t include NPAs of State Bank of India (SBI) since India’s largest bank was yet to announce its December quarter earnings as on that date. SBI said on 13 February that its NPAs at the end of December touched Rs. 40,098.43 crore, or 4.61% of its total advances, the highest proportion since September 2005.
Many corporate and retail borrowers have been unable to repay debt as economic growth slowed to under 7% this fiscal from 8.4% in the previous one. After declining continuously between fiscal years 1995-96 to 2007-08, the total stock of bad loans has seen a sharp rise, RBI deputy governor Anand Sinha said in February.
“From 15% in 1995, NPAs came down till 2008, but they have risen sharply by 91%, or Rs. 46,670 crore, between 2005-06 and 2010-11,” Sinha said atMint’s annual banking conclave in Mumbai.
Another policy intervention that ARCs have been hoping for to incentivize the effort and resources required to buy and revive a distressed asset is to allow them to covert a portion of the debt attached to it into equity.
At present, there are regulatory restrictions on ARCs picking up a stake and they make money by earning a fee in lieu of managing the trust through which the asset is acquired and the debt, recovered.
Kumar of International Asset Securitisation said that an amendment to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, to allow conversion of debt to equity had been moved in the winter session of Parliament in 2011 and is pending before a standing committee.
The SARFAESI Act provides the framework in which ARCs operate.
aveek.d@livemint.com


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Govt tables Amendment Bill to deal with recovery of bad loans

The government on Monday introduced an Amendment Bill in Parliament to enable banks and financial firms to effectively deal with the problem of bad loans.

The move could help bring down lending rates for home and corporate loans, experts said. Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, which was introduced by minister of state for finance Namo Narain Meena in the Lok Sabha, seeks to strengthen recovery process of secured loans.

It seeks to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 and Recovery of Debts due to Banks and Financial Institutions (RDBF) Act 1993.

The amendment in SARFAESI Act will "provide for conversion of any part of the debt into shares of a borrower company and such conversion shall be deemed always to have been valid as if the provisions of said conversion were in force at all material times."

Besides, it seeks to bring multi-State cooperative banks under the category of the bank.

At the same time, it will enable to increase the period of response to be sent by the banks or financial institutions to the representation of the borrowers to 15 days from 7 days.

It will also empower banks or financial institutions to accept the immovable property in full or partial satisfaction of the claims of the bank against the defaulting borrower.

The amendment will allow district magistrate or the chief metropolitan magistrate to authorise any subordinate officer to take possession of assets or forward assets to the secured creditors.

The Bill has also proposed to amend the RDBF Act 1993 that among other things would "enable the banks and financial institutions to enter into settlement or compromise with the borrowers and also to empower
Debts Recovery Tribunals to pass an order acknowledging such settlement or compromise."

It also seeks "to permit the multi State Cooperative banks, with respect to debts due before or after the commencement of the proposed legislation, to opt either to initiate proceedings under the the Multi-State Co-operative Societies Act 2002 or to initiate proceedings before the Debt Recovery Tribunal."

To ensure expeditious adjudication and recovery of dues of banks and financial institutions, remove legal anomalies and strengthen the Recovery Tribunal, the RDBF Act was amended in the years 1995, 2000 and 2004, the Bill said.

"Once the Bill is cleared, procedural changes in loan recovery is expected to lower the cost of funds for borrowers," Ernst & Young partner Ashvin Parekh said, adding that risk premium on secured loans will soften.

Dues from defaulters: Govt seeks first right of claim

New Delhi, Oct. 27: 

The Government has included a provision in the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill 2011, which will allow it to have the first claim on dues from defaulting borrowers from the sale proceeds of any asset seized by banks from them.

An Income-Tax Department official said that a total of Rs 3,700 crore is due as direct taxes alone from sick industrial units whose cases are pending before the Board for Industrial and Financial Reconstruction (BIFR).

The Financial Services Secretary, Mr D. K. Mittal, told Business Line that “Government dues have a bigger profile than the dues to banks. More people get affected because of Government dues.”

Government dues involve income-tax, capital gains, Excise and Customs duties, beside sales tax/VAT at the State level. The Bill is to be introduced in the winter session of Parliament.

It seeks to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 and the Recovery of Debts due to Banks and Financial Institutions (RDBF) Act 1993.

Initially there were differences between the Revenue Department and the Financial Services Departments over the proposal. The former was in favour, but the latter was not. But finally the former won the day, sources added. 

At present, in the case of sick companies and matters filed before the BIFR, the Government has to wait for the BIFR's order on whether it or banks get the dues first. There is no estimate of the dues for the cases pending before the Debt Recovery Tribunals (DRTs).