MUMBAI: Banks have rushed to sell their non-performing assets (NPAs) in the last quarter of the fiscal ending March 2017, as stricter provisioning norms on sale of stressed loans kick in from April 1.
Banks have lined up more than Rs 20,000 crore of NPAs to be sold to asset reconstruction companies (ARCs) so far in March — more than double the amount they had put up for sale in the first nine months of the year.
Under new norms notified by the Reserve Bank of India (RBI) in September, if security receipts (SRs) make more than 50 per cent of the value of the asset under consideration, banks have to provide for these loans as if the loans continue on the books of the bank.
The guidelines released on September 1 push banks to make more NPA sales in return for cash rather than SRs to make sure that stressed asset sales by banks are actually ‘true sale’ of assets. Security receipts are issued by ARCs to banks pending recovery from an account.
Banks can encash them only after the loan concerned has been recovered by the ARC. Since August 2014, banks have to ensure that at least 15 per cent of the NPA sales are in cash. However, banks did not have to provide for the loans sold in exchange of SRs. This will now change from April 1 likely forcing them to push more sales in exchange for cash.
“RBI directions on September 1are going to significantly change NPA asset sales by banks and financial institutions. The NPA asset sales effective next year would be mostly on cash basis in the view of the change in regulations because banks will not have any advantage on selling SRs,” said VP Shetty, chairman JM Financial Asset Reconstruction Co.
Gross NPAs of commercial banks in India have risen to Rs 6.97 lakh crore in the quarter ended December. In the past two years, gross NPAs have risen two and a half times from Rs 2.62 lakh crore mainly as a sharp drop in commodity prices and delays in infrastructure projects have made repayment difficult for debt-laden companies.
However, banks putting these assets on blocks does not mean they will be sold. Most of the time these loans end up not being sold as there is a big difference in the price banks demand and what ARCs are willing to pay.
“Ultimately, the proof of the pudding is whether these assets really get sold. The accounts on the block this month are from small enterprises, infrastructure and some individual loans but for most of these the valuation does not match and many are coming back after not being sold last year,” said a CEO of an ARC.
The strike rate for sale of these loans is extremely poor with many times less than 10 per cent being finally sold. The situation is more acute currently because public sector executives are reluctant to take decisions due to fear of being pulled up later by government agencies.