The strategic advantage of addressing the NPA resolution and recovery in a timely manner is well understood by the banking sector. One of the important aspect being unlocking financial and human capital of the banks, it is important to decide to deal with it by selling down to ARCs

Once decided, identifying the cases for transfer and constituting a portfolio is the second important step. Due care must be taken to constitute the portfolio based on the requirements of the selling banks. It is also important that once a portfolio is constituted, the same should not be modified during the process of sale having regard to the substantial efforts put in by the prospective buyers as well as the selling banks during the process. The portfolio is identified as of a reference date commonly known as "cut-off date", with information frozen as of that date and offered to prospective sellers. The offers are invited as of the cut-off date and any changes in the portfolio after the cut-off date are promptly informed to the prospective buyers and adjustments made for the same accordingly.

It is important for either party to be aware and be sensitive to the expectations of the other. While sellers expectation is to maximize value out of the portfolio on sale, the same is to be seen from perspective of transfer of various risks relating to the NPLs . The value expectation by the sellers should be from the perspective of net present value of the expected realization from the underlying NPA related risks, associated probability of realization after considering costs of resolution, legal and other risks, relative security status with reference to other participating lenders and most importantly factoring estimated time to realize. While the buyers should be aware of the maximum value expectation in the hands of the seller based on the above, the sellers should also be aware that the buyers interest would be waning unless the transaction is commercially viable taking into consideration the risks and reward equation.

Accordingly the seller establishes documentary back up to justify its value expectation, and shares the same with the prospective buyers in a transparent manner during the sale process. Any lack of evidence to support the expected realization for the selling bank shall affect the value perception from the buyer’s view as the same is predominantly dependant on the information provided by the seller during the due diligence process. Some of the important value drivers are fair estimation of the realization cash-flow in the NPA accounts, security status of the bank with respective to other participating lenders, share of each of the participating lenders in the borrower accounts, legal status of any recovery action, challenges in executing the recovery strategies, crown liabilities (including worker claims, statutory claims, etc.) decision of other participating lenders, borrower’s initiative, if any towards resolution etc. In short like any other product sale in a NPA sale situation, it is critically important for the sell side to provide adequate information to maximize value.

The process then involves setting up a data room by the seller with all the relevant legal and operational files to support the value expectation for the prospective buyers to conduct their due diligence. The dealing officials of the accounts are present during the process to address queries with respect to each of the account. The buyers are assisted to conduct the due-diligence with all the relevant information to facilitate them decide on appropriate valuation of the portfolio. Information provided by seller is the key for value driver. Whenever the prospective buyer is in ARC, the selling bank needs to also decide whether to exit clean for cash or risk-participate by staying invested in the SRs issued by the ARC. The buyers enter into the transaction, where there are possibilities of value addition and are commercially beneficial. The same is achieved by focused deployment of resources, legal empowerments and adopting appropriate resolution strategies. The sellers, depending on the risk appetite may decide upfront, whether to benefit by staying invested in SRs out of the value addition by the buyers upon resolution or to exit clean by accepting up-front payment.

Maximization of value, which is the primary objective of the selling NPLs can only be achieved by ensuring active participation by the buyers, sharing maximum information which is the value driver and timely deal consummation. Any lack of confidence of the buyers leading to failure of or delay in the deal closure can have a negative impact on overall perception of the market.

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