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Business News/ Politics / Policy/  Raghuram Rajan meets banks, ARCs and PE firms to accelerate bad loan sales
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Raghuram Rajan meets banks, ARCs and PE firms to accelerate bad loan sales

RBI would closely look at the suggestions made at the meeting and would come up with instructions in some time, said Rajan

RBI governor Raghuram Rajan also asked PE players why they weren’t investing in bad loans, when there are a number of assets which could be turned around with their help. Photo: Abhijit Bhatlekar/Mint Premium
RBI governor Raghuram Rajan also asked PE players why they weren’t investing in bad loans, when there are a number of assets which could be turned around with their help. Photo: Abhijit Bhatlekar/Mint

Mumbai: Reserve Bank of India (RBI) governor Raghuram Rajan met the top management of the banking industry, asset reconstruction companies (ARCs) and private equity (PE) firms on Wednesday to discuss why sale of bad loans had slowed down and how the regulator could help improve the situation.

According to two people who attended the meeting, Rajan first met top bankers from private and state-owned banks to understand why they weren’t closing bad asset sales with ARCs.

“While the bankers are putting these bad loans on the block, the sale never gets closer because there is always a pricing mismatch. At times, public sector bankers drag their feet too," said one of the two persons quoted above, requesting anonymity.

After listening to bankers’ concerns, Rajan met with representatives of ARCs and PE firms invited to the meeting and listened to their problems with respect to bad loan sale.

Some of the problems that the ARC industry put up, included the steep pricing of these assets by banks, lack of a fixed mechanism to ensure debt aggregation and lack of proper funding for these bad loans.

“In a consortium lending case, there are always lenders who do not sell to ARCs. This leads to a lot of problems when we are trying to resolve the stress and recover money because each decision is delayed by weeks," said the first person quoted above.

ARCs in India have been struggling to raise capital to fund their bad asset buys after the banking regulator made it mandatory to make an upfront payment of 15% of the net asset value from 5% earlier. The new rules came into effect in August 2014.

With the rise in the cash component, the net worth of ARCs was adequate to buy only 20,000 crore of stressed assets, which is a very small part of overall non-performing assets in the banking industry, according to a report by Alvarez & Marsal, released in November 2014.

The RBI governor also asked PE players why they weren’t investing in bad loans, when there are a number of assets which could be turned around with their help.

“If banks are willing to sell the assets on a mark-to-market basis and not hinge upon the actual amount it has invested, then PE funds can come in and bring a new management and turn around these assets," said the second person quoted above, a fund manager.

A number of foreign and domestic funds would be interested in investing in the Indian bad loan market if there is a realistic framework around it, the fund manager added.

In the framework on revitalizing stressed loans, released in January 2014, the central bank said external agencies such as ARCs, PE firms and large non-banking financial companies with proven expertise in resolution or recovery of stressed assets would prove to be essential in the process of resolving bad loans.

While Rajan did not announce any decisions immediately, he promised the attendees that the RBI would closely look at the suggestions made at the meeting and would come up with instructions in some time.

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Published: 30 Jul 2015, 10:13 AM IST
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