What NARCL needs to do: It needs to convince buyers that they are getting value for their money

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He should be able to lead by example by proposing an appropriate resolution for most of these assets.

Now that the National Asset Reconstruction Company (NARCL) is armed with a government guarantee of Rs 36,600 crore for the security receipts (SRs) it will issue, it must get to work. It is not enough that the assets – some Rs 90,000 crore in the first round – are transferred and that the banks pocket 15% of the determined value in cash and a government promise for the remainder in five years. It is essential that the assets, or at least a large part of them, are resolved. This will depend to a large extent on the quality of the management and execution of NARCL and its associated asset manager, the India Debt Resolution Company (IDRCL).

The sad truth is that the track record of existing CRAs in India leaves a lot to be desired. The strategy in this market has generally been to acquire bad debt with underlying assets and then try to recover by selling those assets. The CRAs, of course, received a management fee from the banks for the management of these assets. But, in all these years, the results have been below average; we have seen little evidence of an actual resolution or a turnaround in companies.

Certainly, NARCL is better placed to perform collections because it has a great advantage in that it will allow the aggregation of each bank’s exposures to each of the non-performing assets (NPAs). This immediately solves the problem of applying collateral for each of the assets, the quality of which often varied from one lender to another.

With this advantage and the weight of a government guarantee backing its titles, NARCL has few excuses to follow the path of its predecessors. He should be able to lead by example by proposing an appropriate resolution for most of these assets. In many ways, this is a test case for the Indian debt resolution market, and NARCL must rise to the task. While prevention is always better than cure and bankers must learn to lend wisely, things can always go wrong without lenders being held responsible. However, a vibrant debt resolution market will make bankers less risk averse and improve the lending environment. The sooner NARCL and IDRCL get along, the better; the point is, the cycle of stressed assets is not over even though banks have almost stopped lending to businesses.

It won’t be easy. Most of the transferred assets could not be resolved through the IBC’s Corporate Insolvency Resolution Process (CIRP). They’ve been smoldering on the books of banks, mostly in the public sector, for almost five years now. How, one might ask, will they find takers from now on? After all, resolution through the insolvency process has often attracted bids close to liquidation value, perhaps because bidders are never sure how much of the decline. Buyers need to be confident that they are getting their money’s worth. And it’s up to the leadership of NARCL and IDRCL to rehabilitate the assets for buyers to bite.

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