Second Time Lucky? Yes Bank Reworks Its ARC Plan

Months after the Reserve Bank of India rejected Yes Bank Ltd's application for an asset reconstruction company license, the bank is making another attempt.

According to two people in the know, who spoke on conditions of anonymity, the ARC is now being planned as an 80-20 joint venture where an external investor will hold the majority stake and the bank will continue to be a minority investor.

Yes Bank is currently in talks with international investors including Cerberus Capital Management, Varde Partners, Lone Star and JC Flowers to set up this joint venture, according to the people.

BloombergQuint had previously reported that Yes Bank is toying with the idea of creating an ARC where it holds minority stake, after its initial plan was rejected by the RBI. The initial plan involved the bank holding majority interest in the proposed ARC.

The new structure may help the bank satisfy the banking regulator's requirement of having arm's length distance between a bank and an ARC.

With its minority stake, Yes Bank will not have any controlling rights in the proposed ARC, but will continue to retain "protective" rights, the people quoted above said. Under these protective rights, the bank will be eligible to get timely information regarding the investment strategy of the ARC and the resolution plans it will implement.

The management of the ARC will remain with the external partner, though it will hire officials from Yes Bank's stressed asset resolution division, the first person quoted above said.

The private sector lender is looking to sell around Rs 40,000 crore in stressed loans to the ARC through an open auction process. While the ARC will determine a base price, the sale will happen under the Swiss auction method, where it will hold the right of first refusal.

Under a Swiss auction method, the bank's ARC will quote a price for the bad loan on sale and other ARCs will be invited to offer a better price. If another ARC quotes a better price, Yes Bank's own ARC can either match the bid or withdraw from the sale process.

Queries mailed to Yes Bank, Cerberus Capital, JC Flowers and Lone Star remained unanswered. Varde Partners declined to comment.

While the ARC will start with purchasing only loans from Yes Bank, it will eventually expand to the broader distressed asset market, the second person quoted above said. In this, Yes Bank's ARC will compete with the National Asset Reconstruction Company Ltd, the bad bank which is currently being set up with investments from 16 lenders.

In a newspaper advertisement on Wednesday, Yes Bank's process advisor EY said that it is seeking expressions of interest for the ARC from investors including foreign institutional investors, foreign portfolio investors, private equity and venture capital funds, domestic or foreign investment institutions, asset management companies, non-bank finance companies, ARCs and banks.

As per conditions laid down by EY, the investor must have minimum assets under management and funds deployed globally of $5 billion (approximately Rs 37,500 crore). The investors must also have a demonstrated ability to commit approximately $500 million (approximately Rs 3,750 crore) for investment or deployment.

Apart from financial requirements, the investors must have demonstrated ability in the distressed asset space and must satisfy the RBI's fit and proper guidelines, the advertisement said.

In March 2020, the RBI had put Yes Bank under moratorium and replaced its board and management. This was after the bank's balance sheet fell in to deep financial stress due to a build up of large bad loans. The rescue effort for Yes Bank was led by multiple lenders including State Bank of India, ICICI Bank, Housing Development Finance Corporation Ltd and Axis Bank.

However, the reconstructed bank continues to have a large legacy pile of bad loans to deal with.

As of June 30, Yes Bank had outstanding gross non-performing assets worth Rs 28,506 crore. Apart from this, the bank also carried non-performing investments worth Rs 10,315 crore on its balance sheet and had cumulatively written off loans worth Rs 17,065 crore.

A large portion of the bad loans included stressed corporate entities including the Anil Ambani-owned Reliance Group firms, Zee Entertainment Enterprises Ltd., Videocon Industries, some major real estate firms, among others.