News report

Lenders Seek Clarification From Wrong Bank Over Invoking Collateral

Mumbai: In a move that could delay the sale of embittered debt to the National Asset Reconstruction Company (NARCL), lenders decided to transfer bad debts only after clarity emerged on the terms under which government guarantees could be invoked to fill collection shortfalls, those familiar with the development told ET.

The topic has gained prominence because banks have never invoked a government guarantee in the past. Senior bank officials expressed their reservations about the matter to NARCL management at a meeting last week, the people quoted above said.

NARCL, which is part of the key bad bank initiative announced by the government in the FY21 budget to help clean up the banking books, has yet to acquire a single non-performing loan from lenders. .

A government guarantee is the biggest attraction for lenders to sell distressed loans to NARCL.

The lenders requested details of the circumstances that could trigger the invocation of the guarantee, eligibility for the invocation of the guarantee, conditional precedents for its invocation and payment deadlines.

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Under the proposed mechanism, NARCL would acquire loans from lenders under a 15:85 structure in which 15% of the counterparty amount would be paid upfront. The 85% balance would be in the form of Security Receipts (SR) which would be redeemed at a pre-determined price by the end of five years.

Last September, the Cabinet approved a proposal to provide ₹30,600 crore in government guarantees on SRs issued by NARCL. This guarantee can be invoked in the event of a shortfall in the reimbursement of SRs.

Lenders are now asking for clarification on how this guarantee would work in the event of a shortfall in the collection of bad debts. “Banks have never invoked even the guarantees issued by public institutions. Here we are talking about invoking the sovereign guarantee,” said a banking veteran attending the meeting. “We have no precedent to follow,” he added.

The sale agreement between NARCL and the lenders will have to specify the conditions for invoking the guarantee, which could delay the sale of bad debts.

NARCL has offered to acquire about 2,000,000,000 bad debts and its agent India Debt Resolution Company (IDRCL) would be mandated to collect them.

At last week’s meeting, the lenders also discussed issues related to management fees and the valuation of those accounts that could be sold.

NARCL has informed lenders that it is in the process of making offers to acquire some of the loans from the initial list released a year ago. It also released a new list of 17 accounts, including those of the two Srei companies and a few Future Group companies. The second list, with outstanding loans of ₹93,240 crore, seeks to gauge lenders’ interest in selling these loans.

Rainbow Papers, VOVL,

and GTL are some of the accounts on the first list.