- November 22, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
The Swiss Challenge auctions conducted as part of the sale of non-performing assets to India’s bad banks are turning out to be profitable.
The bidders are willing to pay more than the offer by the National Asset Reconstruction Co. Ltd (NARCL).
How does the auction work?
- Lenders sell stressed loans to ARCs at a discount in exchange for either cash or a mix of cash and security receipts.
- Under the system, lenders publicly call for counter bids to match the initial offers made by NARCL.
- If they do not get a better offer, NARCL wins the bid.
- If counter bids exceed the NARCL bid, the bad bank can match the improved offer.
- The bad bank pays 15% of the total bid in cash and the remaining amount as security receipts guaranteed by the government while the private ARCs will have to pay 100% in cash.
- The security receipts are redeemable when the ARC recovers the specific loan.
Asset Reconstruction Company (ARC)?
- It is a specialized financial institution that buys the Non-Performing Assets (NPAs) from banks and financial institutions so that they can clean up their balance sheets. This helps banks to concentrate on normal banking activities.
- The asset reconstruction companies or ARCs are registered under the RBI.
- The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis for the setting up of ARCs in India.
National Asset Reconstruction Co. Ltd (NARCL).
- NARCL is a government entity incorporated on 7th July 2021 with majority stake held by Public Sector Banks and balance by Private Banks with Canara Bank being the Sponsor Bank.
- NARCL is registered with the Reserved Bank of India as an Asset Reconstruction Company under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
- It along with the India Debt Resolution Company Limited (IDRCL) aims for aggregation and resolution of Non-Performing Assets (NPAs) in the banking industry
- How will the NARCL-IDRCL work?
- The NARCL will first purchase bad loans from banks and pay 15% of the agreed price in cash and the remaining 85% will be in the form of “Security Receipts”.
- When the assets are sold, with the help of IDRCL, the commercial banks will be paid back the rest.
- If the bad bank is unable to sell the bad loan, or has to sell it at a loss, then the government guarantee will be invoked and the difference between what the commercial bank was supposed to get and what the bad bank was able to raise will be paid from the Rs 30,600 crore that has been provided by the government.
A Swiss Challenge
- It is a method of bidding, often used in public projects.
- Under it an interested party initiates a proposal for a contract or the bid for a project
- The government then puts the details of the project out in the public and invites proposals from others interested in executing it.
- On the receipt of these bids, the original contractor gets an opportunity to match the best bid.
- In case the original proposer is not able to match the more attractive and competing counter proposal, the project will be awarded to the counter-proposal.
- Example-Applied to the ongoing bankruptcy cases
- The Swiss Challenge allows a seller to mix-and-match the features of both an open auction and a closed tender to discover the best price for an asset.
- In its original form– a Swiss Challenge allows an infrastructure developer to come up with a suo motu proposal for a new project without waiting for the government to call for bids. This can foster innovation.