PSU bad bank, reforms for asset rejig cos hang fire

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PSU bad bank, reforms for asset rejig cos hang fire
© Provided by The Times of India

Mumbai: Banks have come out of the bad loan mess through provisions made from profits and new capital. However, the deadweight of these old accounts continues to be on their books as the National Asset Reconstruction Company (NARC) or ‘bad bank’ announced in last year’s Budget is yet to take off and some proposed reforms for private asset reconstruction companies (ARCs) are still pending.

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New buyers for bad loans are also needed as the recovery rate is slipping and more bad loans may turn up in future. The recovery rate from bad loans, which jumped from 26% pre-bankruptcy code to around 39% as of FY21, is again slipping thanks to delays in bad loan resolution. Besides, reducing the upfront cash requirement from 15% to 2.5%, an RBI panel had proposed major reforms for ARCs. They include allowing ARCs to submit resolution plans for bankrupt companies.

“The next wave of NPAs will emanate from stressed MSME and retail sectors after the available restructuring windows close. For transfer of these small-ticket loans to ARCs, there is an urgent need to broad base investor base with inclusion of high net-worth individuals, corporates, family offices, trusts to subscribe to ARC security receipts, as recommended by the RBI appointed committee recently,” said Hari Hara Mishra, director, UV ARC.

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According to Edelweiss ARC MD R K Bansal, there is a need to discontinue the minimum alternate tax (section 115JB) that is currently levied on a company whose application under the provisions of IBC has been admitted by NCLT, till the time that the company’s prospects turnaround considering the resolution plan submitted to the NCLT. “This would benefit in carrying forward the entire brought forward book losses and unabsorbed depreciation for set off in future years, thereby making the acquisition of distressed companies more lucrative,” said Bansal. Buyers of insolvent companies face tax demands if the price they pay is less than the fair market value or the listed price. As speculators can ramp up prices of even insolvent companies with zero net worth, the market price is not reflective of underlying value.

“The authorities must also focus on additional challenges that affect the majority of corporate insolvency resolution processes (CIRPs) such as being cash-starved leading to inordinate delays. There is also a lack of clarity on the position of the interim financier as to what information the financier is privy to and clear-cut guidelines for institutions lending in this space. In addition, a framework for fast-track disposal of litigations for timely completion of the CIRP process is also the need of the hour,” said Kundan Shahi, founder and CEO, LegalPay.

Another hindrance for an ARC in resolution is the 1% tax deduction at source (TDS) on sale of immovable property under Section 194-IA. “The ARC exercises its rights under the Sarfaesi Act as a secured lender and only appropriates the proceeds to the extent of its dues. Any excess amount realized over and above the dues is returned to the borrower. Therefore, TDS on sale of property under Sarfaesi may be kept out of the purview of Section 194-IA,” said Bansal.

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