Yes Bank Ltd. is looking at other ways to clean up its legacy loan book after the Reserve Bank of India halted its intention to deposit bad loans in a separate entity. Yes Bank continues to retain big bad loans and is looking for a way out more than a year after a reconstruction scheme was introduced.
Its initial intention was to form an asset rehabilitation company with the bank as the majority shareholder. According to two people familiar with the situation, the RBI has expressed reservations about the structure. This is because the regulator’s rules aim to maintain an arm’s length relationship between a bank and an ARC, which could buy the lender’s bad loans. This development was first recorded in March by the Mint newspaper.
Following the rejection of its preferred proposal, Yes Bank is considering forming an ARC in which it would be a minority member, according to the two people mentioned earlier.
To create this ARC, the bank is in talks with international distressed asset investors such as Cerberus Capital Management and Tilden Park Capital Management. The ARC will engage in Yes Bank’s stressed asset auctions and look to buy these assets at fair value once it is operational, according to the two individuals.
Yes Bank would state in the updated proposal that the ARC’s investment decisions will be made by a management committee selected in consultation with other shareholders. Some employees from the bank’s stressed asset resolution department may be transferred to the newly created ARC.
Investors, including Yes Bank, will approach the RBI for an ARC licence once the arrangement is finalised, according to the people. Yes Bank, the Reserve Bank of India, Cerberus Capital, and Tilden Park did not respond to emails sent on Friday.
Yes Bank has had some success in recovering loans from distressed borrowers in the year since it was rebuilt. However, according to pro forma non-performing assets data released alongside earnings for the quarter ended December, gross bad loans still account for about a fifth of the lender’s ledger.
According to the bank’s disclosures, it recovered cash worth Rs 2,973 crore from April to December 2020. In the first nine months of the previous financial year, it also wrote off loans worth Rs 8,274 crore. The bank took ownership of Anil Ambani’s Reliance Centre in Mumbai’s Santacruz neighbourhood earlier this month in exchange for a Rs 1,200 crore debt settlement.
Can the bank’s proposal to set up an ARC help recoveries go faster or better? Former chief executive of ARCIL, India’s oldest ARC, Vinayak Bahuguna is sceptical. He said it’s unclear why the bank would want to invest in an ARC when the selling of bad loans can be done without forming a new company.
“There may be a case to be made about ARC investor appetite, but the RBI also allows banks to sell assets to AIFs (alternative investment funds),” Bahuguna said. “If the bank already has investors on board who may be interested in purchasing assets from it, an AIF made up of these investors might be the buyer without the bank having to get involved.”