‘The NARCL must attract top-quality talent’
The National Asset Reconstruction Company (NARCL) can be a game-changer in cleaning up India’s bad-loan mountain and help banks to lend more freely to India Inc. But will the new agency fire in the way it has been imagined? TARUN BHATIA, managing director and head of South Asia (forensic investigations and intelligence) at Kroll, spoke to Raghu Mohan. Edited excerpts: Banks are to hold a 50 per cent stake in the NARCL, and security receipts are to be issued. How is this a big material change, as it only amounts to a transfer of what was shown on banks’ loan book to the investment book?
The material change is that the last time this was done was 20 years ago.
So, one can try it again. When the concept of asset reconstruction companies (ARCS) was introduced in the early 2000s, there was no Insolvency and Bankruptcy Code
(IBC). NARCL with IBC — which was introduced six years ago — has a different context versus NARCL without IBC. If both had been introduced jointly, then I would have been concerned. The biggest advantage of NARCL is aggregation.
And with the blessings of and backed by government guarantee, it would have more teeth than the previous version of ARCS set up by banks. In a way, NARCL works like a closedended fund where, in five years, they have to resolve cases, otherwise the guarantee lapses. In that case, we will be back to where we started, which is okay. NARCL cannot have it for perpetuity also.
The three-year-old inter-creditor agreement (ICA) framework for resolution of bad assets has not enthused bankers. Do you think they will have a change of heart when they deal with the NARCL, as ICAS are needed here as well?
I think there is visible intent and there is a pressure point for lenders to get their act together, and because the decision maker will be NARCL, not the largest holder of the credit. What I’m saying is that earlier ICAS had challenges, because if you take NARCL out of the picture, then all the banks need to agree among themselves. Now, there is an agency, so you do an ICA and the agency is taking the call.
And you will assume at least that it’s an independent agency taking this call, and is not influenced by which bank had the maximum stake, because that is the benefit of aggregation — unlike the situation earlier, where the smaller banks or those with smaller exposure always felt that they were being left out, or their interests were not considered.
The NARCL can’t be expected to run a company. So, how does this play out?
Even when the IBC came in, the first doubt was that banks don’t know how to run a company after having taken control of it, right? That they don’t know how to run an airline, or a steel plant. But what we have seen is that banks have either been able to resolve, or liquidate it. If we just take the distressed asset where the board gets dissolved, the shares actually have zero value under the IBC framework. And then, new investors come in who take over that debt and control. And that’s why equity holders get nothing; it’s the debt holders who get repaid.
My sense is that the NARCL will have to recruit good talent. Today, they may have people who are seconded from banks and they are of course, hiring. But the key will be to position NARCL as a very strong, independent body with high-calibre people. Like the National Investment and Infrastructure Fund, where you have Sujay Bose at the top and very competent people from the industry. If bankers are to be sitting in NARCL, it will have a short shelf life, or a long shelf life without any utility!
To the extent that the NARCL is not privileged over banks in the IBC, what makes you hopeful that it will work?
The NARCL is a pooling agency. So, conceptually it does not need to be above the banks. You don’t want to give it that kind of superpower, but it has the accumulated debt, and so, its ability to go to market looking for investors is much stronger.
The Securities and Exchange Board of India has made a case for carving out a separate category among Alternative Investment Funds (AIFS) to buy into bad debt. What is your view on this?
The reality is that India is right now attracting a lot of money for multiple reasons. There is a huge amount of liquidity circulating in the global markets. And with this Evergrande issue in China, there will be more money in the short term. Now, take Jet Airways out here, which is to be operational from next year. From a distressed assets’ point of view, it’s a good success story, right? A good operating airline — and I am not getting into its balance sheet — went down and is coming up, and this wouldn’t have happened in the past. We have other airlines in history which have gone down and never came up. Plus, the Essar Steel resolution.
I think these examples are there in the minds of investors. There is a growing class of distressed investors like high-net worth individuals, family offices, and so on. And post- Covid, there is a general view that there will be a large amount of good operating distressed assets available because the distress is not so much due to the business model as due to the crisis. If your only avenue is NARCL or domestic ARCS, then you are again constrained. I think allowing a subcategory of AIFS to come into distressed assets as stakeholders is good.