asset reconstruction company_section z_final
TRANSCRIPT
8/7/2019 Asset Reconstruction Company_Section Z_Final
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Presented by: Group 12, Section ZKaran Soni (91085)
Anubha Rustagi (91126)
Komal Soni (91138)SudhanshuArya (91158)
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SARFAESI Act,2002 defined non- performing
assets as an asset or account of a borrower,
which has been classified by a bank orfinancial institution as sub-standard,
doubtful, or loss assets in accordance and
guidelines relating to asset classification bythe RBI.
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STANDARD ASSETS: These are good and
performing assets.
SUB-STANDARD ASSETS: an asset is
considered bad when borrower has defaultedon principal and interest repayment for morethan one quarter or 90 days.
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DOUBTFUL ASSETS: they find their way
from sub-standard assets after 18 months in
Indian context against 12 months under theinternational norms.
LOSS ASSETS: An asset which has beendeclared by the bank or auditors or by RBI oninspection.
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Interest or principal (or installment) isoverdue for a period of 90 days or more from
the date of acquisition or the due date as percontract between the borrower and theoriginator, whichever is later;
Interest or principal (or instalment) is overduefor a period of 90 days or more from the datefixed for receipt thereof in the planformulated for realisation of the assets
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Interest or principal (or installment) is
overdue on expiry of the planning period,
where no plan is formulated for realization of the
Any other receivable, if it is overdue for a
period of 180 days or more in the books of the SC or ARC.
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In India the only NPLs which may be sold are:
non-performing assets, being loans where there
has been a default for at least 90 days;Or
standard assets in circumstances where 75% of the face value of the loans to the relevant debtorhave been classified as nonperforming and 75% byvalue of the lenders have agreed to sell their loansto an ARC.
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Provision Coverage Ratio
Technical write-offs
Security Receipts
Debt recovery tribunal
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ARCs are created to manage and recover
NPAs acquired from the banking system
ARCs act as a bad bank by isolating NPAsfrom the balance sheet of bank/FII and
facilitate the bank to concentrate innormal banking activities
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Centralisation of bad loans in one or a few hands andtherefore obviously more clout
It is possible to give special legislative powers to a
few AMCs rather than to each bank Banks are left with cleaner balance sheets and do
not have to deal with problem clients. Regularbanking relations with the group are not affected.
Because it deals with a larger portfolio, it can mix upgood assets with bad ones and make a sale which ispalatable to buyers.
It is easier to do a capital-market based funding foran AMC than for the banks themselves.
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ARCIL acquired 20 assets aggregate principal
outstanding of Rs 40 crore
The small asset portfolio scheme March 2005 : recovered cash of Rs 6.5 crore
(45 per cent of the acquisition price of theportfolio)
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Arcil acquired bad debts worth :
Rs5,051 crore from State Bank of India,
Rs2,848 crore from IDBI Rs1,290 crore from Punjab National Bank
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Bank of India : acquisition of non-performing
assets worth about Rs250 crore.
Rs11,209 crore from ICICI Bank ( majorly badhome loans )
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Central Bank of India and Punjab and SindBank, announced sale of distressed assets, a
staggering ̀ 3,500 crore in the case.
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Banks have become more conscious of bad
loans and are speeding up recovery
mechanism Deep gap between what banks expect in
return for NPAs and what ARCs are willing tooffer
Banks capacity to hold on to bad loans haveimproved
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RBIs one time dispensation to banks to
restructure bad loans in wake of global
financial crisis RBIs permission to allow for technical write-
offs for the calculation of provisioningcoverage ratio
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In 1980s, U.S. used government sponsored ARC -Resolution Trust Corporation (RTC) to overcome thriftcrisis
In the early 1990s Mexico and Sweden demonstratedsuccessful use of ARC mechanism
Korea used KAMCO as the nodal agency-securitization and joint venture route
In Malaysia, Danaharta is the centralized ARC set upat the instance of Government- restructured andconsolidated the banking system
In Taiwan, the ARC model envisages liquidation of assets through the sale of assets to investors
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The problem of recovery from NPAs, in theIndian banking system, was recognized by
the Government of India (GOI) as far back asin 1997, when the "Narasimhan Committee"was appointed.
The Narasimhan Committee Report
mentioned that an important aspect of thecontinuing reform process was to reduce thehigh level of NPAs as a means of bankingsector reform.
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It was expected that with a combination of
policy and institutional development, new
NPAs in future could be lower.
However, the problem of a huge backlog of existing NPAs remained.
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The Parliament of India enacted and passed
the securitization and Reconstruction of
Financial Assets and Enforcement of SecurityInterest Act, 2002, (the Act) to regulate
securitization and reconstruction of financialassets and enforcement of Security Interest
(as defined in the Act) and for mattersconnected therewith.
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Asset workout departments or units of banks
Bank-owned subsidiaries or affiliated
companies Private companies, and
Government owned asset managementagencies
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An agency is sponsored by government whichacquires and resolves the bad assets
It can also have other operations like depositinsurance or bank recapitalisation
Moreover in this model, centralisation of NPAprovides effective asset packaging and marketing,
ensuring consistency and transparency within the ARC In addition, the risk of decrease in sale value of
assets by the competing bank based ARCs is alsoreduced
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A bank based model has two approaches:
workout units
bad banks
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RapidDisposition
Agency
Immediate selldown of debtto third party
investors
Risks andrewards
transferred to
the investors
DebtResolution
Agency
Focus on assetmanagementand resolution
Risks andrewardsretained by
banking system
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SBI IDBI ICICI
ARCIL ABC Textiles
Step I
Step 2
Step 3
Step 4
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Overview: SPIC had invested around Rs 165 crore as equity in the Jordanianventure, which mines rock phosphate and produces phosphoric acid.
The $170 million Indo-Jordan Chemicals Company is a joint venture between
SPIC, JPMC and the Arab Investment Company (TAIC)
ARCIL has undertaken a massive clean up of the finances at SPIC. It has soughtthe auctioning of SPIC's fifteen properties to raise funds
SPIC owes its creditors close to Rs 2,900 crore
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Objective: To restart the closed fertilizer plant of SPIC Action Undertaken by ARCIL: It has signed a memorandum of
understanding (MoU) to sell the 52.5% stake in Indo-JordanChemicals Company (IJCC), a subsidiary of Spic for around Rs.350crores
The joint venture partner Jordan Phospates Mines Company
bought back the stake held by SPIC
Money raised from this exercise would be utilised towardsrestarting the fertiliser plant in Thoothukudi, in south Tamil Nadu
SPIC had mandated investment banker Rabo Bank to find a suitor
for the stake in IJCC and was expecting Rs 400 crore to Rs 500crore from the sale.
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ARCs are empowered to take the followingmeasures for asset reconstruction: Take possession of secured assets
Sell or lease a part or whole of the business of theborrower
Change or take over of the management of thebusiness of the borrower
Rescheduling the payment of debt payable by theborrower
Settlement of dues payable by the borrower
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At present there are 13 companies operating
as asset reconstruction companies each
trying to grab a bite of the scarce business. Major names:
ARCIL
Reliance Asset Reconstruction Company Ltd.
India SME Asset Reconstruction Company Ltd.
Edelweiss Asset Reconstruction Company Ltd.
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First to commence business in India ICICI Bank, Karur Vysya Bank, Banks that have shareholding in ARCIL:
Karnataka Bank Citicorp (I) Finance SBI IDBI PNB
HDFC and some other banks ICICI bank is the largest seller of bad loans to ARCIL
followed by SBI and IDBI Acquired INR 12000 Cr worth NPAs in FY10
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RealizingNPAs
Settlement withpromoters and strip sale
of assets
M & As
Various otherresolution strategies
DebtRestructuin
g
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Sale of borrower companys
business/assets
Settlement Restructuring
Legal
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Souce: ARCIL
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Rating based on recovery potential of SRs:
Value of the underlying collateral
Expected time to recovery
Fitch's NPA Security Receipt Ratings (NR) are issued on ascale of 'NR1(ind)' (highest) to 'NR6(ind)' (lowest)
With 'NR1' being assigned to SRs with prospects of collection
more than 150% of the face value of the SRs, and 'NR6'assigned to SRs whose prospect of collection is 0%-25% of the face value of the SRs
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Engaged in the business of knitwear Total principal debt of Rs 18 crore. ARCIL acquired entire debt in the company
Resolution : restructuring with the existing management
conversion of a part of the debt into equity. Arcil has stipulated earn-out clause on a portion of
this equity.
Besides, Arcil has pledge the promoters shares. Arcilhas recovered more than 12 per cent of total dues andexpects to meet its acquisition price and earn areasonable return on present value basis.
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Engaged in the business of laminated tubes Total principal debt of Rs 374 crore. ARCIL acquired about 46 per cent of total
debt in the company Resolution :
creation of multiple maturity buckets for
repayments to lenders based on varyingrepayment tenor and linked sacrifice.
The lenders have to choose the bucket based ontheir requirements.
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Acquisition
Price risk
Quality of loan risk
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Management
Collateral deterioration
Legal Risk Sovereign Risk
Servicer performance risk
Financial guarantor risk
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Exit
Credit risk
Prepayment risk
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Variation of 7 to 100 percent in valuation Reasons for variation:
Asset Quality declines in proportion to theamount of time they stay in the system
Market Value of Collaterals
Legal Fra
mework and Resolution Methods -Holding costs are directly proportional to the time
required to exit (eg: KAMCO, TAMC)
Account information and data collation
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Base: estimating a DCF on all expected net
cash flow from the loan through workout to
performing status, or from underlyingcollateral if the loan is liquidated
3 Major Models:
Derived Investment Value Model
Estimated Return for Secured Non PerformingAssets (ERSNA) Model
LAMM Model
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Clean exit: Exit by cash
Exit through SRs
Approval sought for consistency in valuationunder both options
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Biggest success of ARCIL
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Mid 1990s
The company expandedmassively
2000-03
Could not sustain the growth
Erosion of networth by 50 %
Default in payments
2004
Birla had a debt of 326 crore ,
Them
ajor lenders wereB
ank of India, Union
Bank, UC
O B
ank,B
ank of B
aroda and StateB
ank of Saurashtra.
The net worth was eroded by almost 100 % due to accumulated losses
Acquisition of financial assistance by ARCIL
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BVXL has also divested its other subsidiaries Masuzawa Punjab silk and VXL Technologies
The proceeds were to be used to pay off loans that had been transferred to the division.
BVXL's entire shareholding in OCM India was sold to US buy-out firm, WL Ross, for about Rs 170 crore.
Loans worth Rs 160 crore were transferred to the division.
the Amritsar facility was carved out into a separate division, OCM India, as a 100 per cent subsidiary.
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Long-term debt, even after the restructuring initiatives, however, remains at about Rs 150 crore.
Post-conversion and the carving out of OCM India, the share capital of the company stands reduced to
Rs 43 crore from about Rs 100 crore.
About Rs 25 crore has been converted into equity.
About Rs 50 crore worth of debt will be paid off through the disposal of non-core assets, which havebeen allocated to a separate investment division.
It exited from its joint venture with Dormeuil Freres of France end of September.
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Converted the debt to equity and held 54 %
shares of the company
Other 2 arms were put on operation as self liquidating vehicles
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From April 2008, Birla VXL changed its name to Digjam.
Arcil maintained an exit clause as part of the takeover leaving it free tosell shares in Digjam.
On March 4 and 5, 2010 , Arcil through a series of open markettransactions executed on the BSE and NSE has sold a total 55 lac sharesat an average price of Rs 12.51, netting around Rs 6.88 crore in theprocess.
In October 2010, ARCIL sold another 352,000 shares at Rs 11.56
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Pricing issues
Issue of pricing on a realizable value on assets
Book value transfer will result in huge losses
Market price transfer will aggregate problems
Debt aggregation Working Capital loans without Collateral , Value is negligible
Public banks not much keen on sale of NPA s Speed up the recovery process
Transparent activities to ensure bidders participation
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The issue of whether or not ARCs can takeSARFEASI action without the approval of BIFR isstill undecided and pending before the Supreme
Court, though High Courts have taken diverse viewson the same.
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It must have Operational Independence andsufficient Authority
Fiscal Incentives for ARC Exemption from Stamp duty ARCs should not be compelled to take over bad
asset higher than the realizable value. Independent board should represent both bank and
Govt. on ARC Accountability and transparency
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Sale of assets acquired by ARCs
Development by ARCs of an active secondary
market for acquired assets Reduction of NPAs in current portfolio of
selected/target public sector banks and otherfinancial institutions
Restructuring plans for weak public sectorbanks and other financial institutions
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Thank You!