Rating agencies need to be more transparent in disclosures on stressed companies and assets so that both the lenders as well as asset reconstruction companies can arrive at the right valuation, a senior Reserve Bank official said today.
“We need better disclosures by credit rating agencies when it comes to stressed companies. Rating agencies must be more transparent in their disclosure about stressed assets and their owners,” RBI Chief General Manager Ajay K Choudhary said here at a seminar on ARCs (asset reconstruction companies) organised by an industry body and Association of ARCs.
The RBI official said such disclosures can go a long way in resolving the dud loan problem in banking sector, which has touched a whopping Rs 8 lakh crore as of March.
Admitting that there are inherent issues like valuation and working capital loans to a company under SDR (strategic debt restructuring), which are preventing smoother development of the domestic ARC industry, he said while banks are not ready to take deeper haircuts, the ARCs are not ready to pay higher value to a stressed asset.
“Valuation is the biggest hurdle in debt resolution now,” Choudhary said, adding rating agencies can help in arriving a the right valuation by better disclosures.
The official also said the just enacted Bankruptcy Code can help ARCs and banks a lot.
Addressing the event on behalf of Economic Affairs Secretary Shaktikanta Das who could not make it, his deputy Saurabh Garg said a draft law on debt resolution mechanism for distressed companies will put out for discussion shortly.
“The government will soon put out a draft on resolution of distressed financial firms for discussion. An expert committee is working on a resolution mechanism to deal with bankruptcy in banks, insurance companies, and other financial sector entities. This is a work in progress and suggestions from the industry are very welcome,” Garg said.
“We are working on this code in the department and may be soon we will be able to get the draft law which will be put out for discussions,” he added.
Terming the new Insolvency and Bankruptcy law, which was approved by Parliament in May, as a milestone, he said the new law allows consolidation of all laws related to insolvency for companies, limited liability entities, unlimited liability partnerships and individuals apart from time-bound mechanism for maximisation of value of the assets.
The new law also separates commercial aspects from judicial aspects of insolvency proceedings, he added.
“The operationalisation of the new law has already started and the focus is to do it as fast as possible with insolvency professionals’ support subject to their availability,” Garg said.
He also expressed hope that a fast-track insolvency
process is also available for smaller corporates and help lead to a quantum leap in the credit market apart from laying the foundation for a corporate bond market.
Calling upon ARCs to bring in more capital, Garg said all the 16 ARCs put together have only around Rs 4,000 crore in net-worth, while the bad loans in the system is close to Rs 8 lakh crore.
“Equity capital of ARCs is an area, where we perhaps need to look at with more focus. Though it is not necessary that their capital base has to be in the same tune as NPAs, but it does reflect that it is an area, where greater focus is required,” Garg said.
He also expressed hope that Parliament will take up the Enforcement of Security Interest and Recovery of Debt Laws and Miscellaneous Amendment Bill, which seeks to amend four laws — Sarfaesi Act, RDDBFI (Recovery of Debts Due to Banks and Financial Institutions) Act, Stamp Act and Depositories Act — in the Monsoon session beginning on July 18.
Addressing the gathering, ARC industry leaders welcomed the new FDI rules that allows 100 per cent foreign capital in the sector and also the new RBI mechanism issued on June 18 for debt resolution of large projects called the S4A (scheme for sustainable structuring of stressed assets.
SBI Caps Managing Director and Chief Executive Varsha Purandare said the S4A is highly doable as it allows the promoters to remain in control and also makes gains when the project value rises.
Hinting at an improvement in overall bad loan problem, she said promoters of debt laden companies are already selling or hiving off their non-core assets to clean their balance-sheets.
Anil Bhatia, Managing Director and Chief Executive of JM Financial ARC, called upon the regulator to ask the banks to continue to provide sustainable capital to a company that is under SDR as without working capital there is no way a debt can be resolved.
“A company under SDR needs substance capital and we hope the new S4A scheme will help. The fact is that the debt restructuring in the actual sense is a myth in our country,” Bhatia said.
Siby Anthony of Edelweiss ARC, which is the largest in the country with an AUM of over Rs 26,000 crore out of the Rs 60,000 crore industry, underlined the need for a consolidated approach to NPA sales.
“Large assets need to be consolidated for better resolution. If an ARC has to go and get the approval from all the dozens of lenders in a consortium, as is the case now, no sensible and time-bound debt sale and resolution can happen,” Anthony said.