About five years ago, the stressed-out asset management team was the busiest unit at most banks. Now, those who handle compliance and risk management work around the clock. It is a welcome change. Viewed through that lens is the RBI discussion paper on the Securitization of the Stressed Asset Framework.
It is a progressive step towards preparing for the future and indicates a commitment to eliminate legacy bad loans from the banking system to free up bandwidth in terms of capital and manpower. We need to channel both productively. In that sense, the draft’s suggestion to create a mechanism to securitize stressed assets (not necessarily non-performing ones) to any entity, and not just an asset rebuilding company, may broaden the options available to banks to reduce costs. bad loans. in balance sheets.
But try this: In 2016, 10.7 percent of total bad loans in the banking system were sold to ARC. That dropped to 3.2 percent in 2022, according to RBI data. If the intention is to build a battleground against bad loans, we must introspect why there have been fewer sales to ARC of late.
For one thing, most of today’s legacy bad loans aren’t necessarily due to operational failures. Many, especially in the energy and infrastructure sector, were funded based on questionable business projections and/or have been investigated by central agencies. When banks have provisioned 100% of these assets and the possible advantage of them is highly questionable, it is a deadlock situation. NACL was conceptualized to address this, but it didn’t make much headway either. Second, ARCs have become a parking option for banks and an entry vehicle for interested investors. This is a problem related to supervision and structure, and whether operational as ARC or otherwise, any amount of regulatory tightening cannot address this problem. It could further draw interest away from the stressed asset space.
Third, selling an asset is invariably simply substituting the bank for another entity for the exposure. Unless the person taking over the bad loans has the majority opinion, both in terms of value and volume in accordance with the requirements of the Bankruptcy and Insolvency Code, it will once again lead to stalemate.
We could create multiple options in the stressed asset resolution space, give resolution specialists fancy names, including that of a resolution manager as suggested in the draft document, and present an extremely good deal on either the retail side or corporate, but still being old wine in a new wineskin. Without addressing the root cause of why ARCs didn’t live up to the initial euphoria, we shouldn’t end up creating more stress to manage stress.
