Banks sell only 20% of bad loan assets to ARCs as they bet on better value from insolvency courts

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Busy with referring large corporate stressed loans to the insolvency courts and not finding buyers offering the right price, bankers sold about Rs 6,000 crore or just about 20 percent of proposed stock of bad loans to asset reconstruction companies.

Banks had put up approximately Rs 30,000 crore worth of assets for sale during the six months period starting April, confirmed the chief of a large asset reconstruction company.

Top banks including State Bank of India (SBI), Punjab National Bank, ICICI Bank, HDFC Bank have sold very few assets given that they plan to get better value through filing cases at the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC), which is used by creditors to resolve their NPAs.
Asset reconstruction companies or ARCs are specialised financial institutions that buy the bad loans or non-performing assets (NPAs) from banks and financial institutions so that the latter can clean up their balance sheets. In other words, ARCs are in the business of buying bad loans from banks.

“ARC sale has not been significant in these two quarters (Q1 and Q2). I think after the insolvency law coming in and the whole strategy around corporate cases, more and more will get referred to the NCLT. We sold Rs 747 crore in Q2 and Rs 16 crore in Q1 to ARCs,” said Rajnish Kumar, Chairman of country’s largest lender, State Bank of India.

He said, “There is a price at which we want to sell and yes, there are also capital issues that the ARCs are facing. But we will be able to handle it better than the ARCs.”

Arcil (Asset Reconstruction Co Of India Ltd), country’s largest ARC, has bought assets worth just Rs 500 crore in the first half of this year so far from April to September. It expects to sell about Rs 3,000-4,000 crore in the second half.

There are about 22 ARCs in the country but only about 6-7 active buyers in the market. Though there is no official data published on the asset sale to ARCs, the estimates are based on industry figures given by ARCs.

According to reports, of the around Rs 5,000-6,000 crore sold, Rs 2,000 crore were sold by Indian Overseas Bank to Edelweiss Asset Reconstruction Company by selling its loans to Essar Steel.

Essar Steel is one of the 12 dirty-dozen large corporate accounts identified by the Reserve Bank of India referred to the insolvency courts.

According to the head of a large ARC, “Normally, the first half is slow in terms of asset sale. Further, the NCLT process has kept the bankers very busy and so asset sale to ARCs has been pushed off to the back burner. We are expecting much more on offer in the second half of the fiscal year till March 2018.”

Over 150 large and mid-corporate cases have been filed by banks for recovery and resolution of existing NPAs under the IBC.

The new RBI norms on ARC sale say that if security receipts (SRs) make more than 50 percent of the value of the asset under consideration, banks have to continue to provide for these loans as if the loans continue in the books of the bank, increasing provisioning requirements for banks and making it less lucrative to put fresh stock of bad loans on sale.

In April, RBI had also hiked the minimum net owned funds for ARCs to Rs 100 crore from Rs 2 crore. Net owned funds include equity capital and free reserves. This means that ARCs are also constrained of capital to buy assets while also seeing a mismatch in price expectation from bankers for selling of assets.

Further banks also have a breather on the capital front as the government has announced a Rs 2.11 lakh crore recapitalisation plan to help banks tide over the provision requirement to be made towards NPA accounts under the insolvency proceedings. This would mean banks could wait for a better price on their assets with no urgency to receive upfront money through asset sale.

Currently, banks are reeling from mounting bad loans worth Rs 8.5 lakh crore, about more than 10 percent of the total loans in the banking system.

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