PSU Banks: PSU Banks Ask RBI to Monitor IDRCL for Smooth NPA Resolution

Mumbai: State lenders and the Reserve Bank of India (RBI) are trying to settle the regulatory and legal status of the private sector company that would solve sticky loans that the “bad bank” acquires.

Under the unique twin-company structure, National Asset Reconstruction Company Ltd (NARCL) – the bad bank in which the majority stake is held by public sector banks – would buy bad loans from commercial banks, while India Debt Resolution Company Ltd (IDRCL), where private sector institutions would hold 51% of the capital, would focus on resolving purchased loans.

“Public sector banks want the RBI to ‘recognize’ the IDRCL. Since the IDRCL will be responsible for managing complex resolution processes, it may encounter legal challenges. These may be better addressed if the ‘entity has regulatory recognition,’ said a person familiar with the ongoing discussion between RBI and the banks, ET said. “However, RBI has some reservations about this as existing regulations make no provision for such a structure,” he said.

Under current rules, an Asset Reconstruction Company (ARC), such as NARCL, which takes over and holds the live assets, is also responsible for resolution. All ARCs are regulated by the central bank.

“Ideally, banks would like the RBI to also regulate the IDRCL (which is not an ARC) and see it as part of the overall bad bank proposition. Even though NARCL has the final say on the path to resolution, it is felt that the IDRCL should be recognized by either the RBI or (the capital markets regulator) Sebi, ”said one banker.

An RBI spokesperson did not comment on the case. Sources said the banks were trying to resolve the issue with the RBI, and the topic could be discussed this week between senior bankers and officials in the financial services department.

The proposal of an ARC operating in tandem with an asset management company (which manages and restructures non-performing assets for a fee) was proposed in the last Union budget.

While some bankers and CRA officials have questioned the need for a separate resolution entity, it is felt that a private sector entity – focusing on resolution and run by people with a state of different spirit and free from the constant vigilance of central government agencies – helping the failing bank to take off faster.

“Being the first such proposal, the PSU banks (the shareholders of NARCL), probably out of great caution, want the overall mechanism to have some regulatory oversight. But, strictly speaking, this is not necessary,” he said. declared an official of a CRA.

The questions that arise are: Will IDRCL, which would act as an exclusive advisor to NARCL, function like any other consultant? Or would it have the power to make deals to turn around a borrower, bring in new management, or sell fixed assets?

NARCL would work like any other ARC, which pays at least 15% of the transaction amount in cash to banks (sale of loans) and the balance in the form of “collateral receipts”, which are similar to bonds and have a eight year lifespan.

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