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We expect NARCL’s offers to come in this week: Swaminathan J, SBI managing director for risk, compliance and stressed assets resolution

The bank now prefers global auctions of bad loans over Swiss challenges as they maximise recoveries, he added.

The target of transferring assets worth Rs 50,000 crore to the National Asset Reconstruction Company (NARCL) in FY22 is a few days behind schedule, Swaminathan J, State Bank of India (SBI) managing director for risk, compliance and stressed assets resolution, told Shritama Bose. The bank now prefers global auctions of bad loans over Swiss challenges as they maximise recoveries, he added. Edited excerpts: 

Will NARCL meet the March 31 deadline to acquire the 15 assets worth Rs 50,000 crore?

The steps that have to happen from the NARCL and the IDRCL are all happening, but at each process there are a few days of delay. From the lenders’ side we have kept everything ready. If NARCL and IDRCL get their act together, they will still be in a position to make a binding offer to the lead lenders. NARCL has issued the expressions of interest and their financial and legal due diligence are almost over. The final report and the binding offer has to come. Once that comes, the lead lenders will convene JLMs (joint lender meetings), get it adopted, run a Swiss challenge and then do the transfer. Anyone who comes to challenge will have to come in cash. We expect the Swiss challenge process to get over quickly, but if there are bidders who come in, we’ll have to give NARCL some extra time to consider if they want to match the offer. This is likely to take a few extra days. This week we are expecting the offers to come in. Once they come in, we’ll be able to put a definitive timeline.

Is there a sense now that IBC is not the most optimum option and you’ll explore other avenues first?

That’s right, but even otherwise, if you look at SBI’s record, almost 40% of our total recoveries have been through normal recovery. The judicial process, including NCLT, constitutes about 30-35%. About 20-25% comes from one-time or compromise settlements. I think that will continue, with or without IBC. But, IBC would have replaced what probably would have gone to DRT. So it’s not as if we are resorting to normal recovery because IBC has not been supportive. It is among the basket of options along with DRT, civil courts, etc. As a commercial banker, I will resort to any legal process only if a normal recovery is impossible.

Has the way banks and ARCs do business changed of late?

The most significant change has been the move to all-cash deals. Since 2019, at SBI we have been preferring mostly cash, and the rest of the industry has also moved toward that in the last two years for the simple reason that the track record with SRs has been extremely poor. Much of the SRs taken during FY14-16 are completing their period and the way in which it requires banks to scale up their provisions, it doesn’t make sense for us to keep the SRs. The second thing we are moving more toward is open auctions. It was felt that earlier ARCs used to show interest in some assets on the basis of information they had, discussions would happen, one of them would make a binding offer and then we would take it as an anchor bid and go for a Swiss challenge. But, we found that the Swiss challenge is not actually getting us the best price because the right of first refusal available with the anchor bidder oftentimes leads to anyone else, who put in a serious bid being undermined. We realised that it limits the competition because the competition wouldn’t want to go the whole hog and do the due diligence knowing well that the anchor bidder can add just Rs 1 crore to their bid and walk away with the asset. Now the preference of the operating teams is to go for open auctions. In some cases where we resorted to open auctions, we got a pricing way better than the reserve price whereas in Swiss challenges, our recoveries were oftentimes in and around the reserve price. Price discovery will continue to happen through Swiss challenges in compliance with regulatory norms, but for price maximisation we are going for open auctions.

How are the restructured pools in the small loans performing?

We can put this in two buckets — Covid 1.0 during the first wave and the subsequent Covid 2.0. We keep watching them separately. In Covid 1.0 some amount of stress is seen, but it’s not more than the NPA plus SMA percentage we have seen. In SME, 7-8% is the stress that we see normally and the Covid 1.0 book is displaying a similar degree of stress. The Covid 2.0 book is behaving pretty well. It has helped many accounts not get into stress at all.

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