Debt recovery through sale of assets remains an exercise in futility for banks, when it comes to large accounts. The repeated failure of bankers to find bidders for some assets of debt-ridden Kingfisher Airlines is a case in point.
Unlike retail loans, where banks repossess a defaulter’s car or house and auction them off to recover their advance, data shows that banks have found it difficult to find buyers for large assets like factories and offices.
The Securities and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002 allows banks and financial institutions to auction properties when borrowers fail to repay loans.
However, banks have recovered only 27%, or Rs.18,500 crore, of the Rs.68,100 crore worth of loans referred to it in fiscal year 2012-13, as per available Reserve Bank of India (RBI) data.
In the following years, the rate of recovery would not have improved dramatically, bankers said.
Bankers themselves are partly to blame for this mess by refusing to take a haircut on asset values. They end up valuing the assets so high that buyers see no reason to enter the deal.
Consider the Kingfisher House auction that took place on Tuesday, the second attempt by the lending consortium to find a buyer. Again, no bidder turned up.
One probable reason, the people close to the auction said, was the high base price of Rs.135 crore, which values the 17,000 sq. ft property in Mumbai at about Rs.80,000 per sq. ft. According to real estate brokers, the average value for commercial real estate in the area is between Rs.20,000 and Rs.30,000 per sq. ft.
“We value the asset after taking quotes from established firms, as is our transparency policy. Going ahead, we may lower the base price a little, but we surely won’t be selling it for a song,” said a senior banker at the State Bank of India (SBI), on the condition of anonymity.
Similarly, the track record of sales to asset reconstruction companies (ARCs) is also poor. In this fiscal, ARCs bought about Rs.20,000 crore worth bad loans, only a fifth of what was put up for sale by lenders, according to the chief executive of a large reconstruction company, who did not want to be named.
“Ever since the regulator (RBI) made sure that ARCs put up a higher investment while buying the asset, the companies have become extremely conscious of the cost at which these are sold,” the ARC chief said.
According to guidelines issued by the RBI in August 2014, ARCs are required to put up at least 15% of the net asset value upfront, as compared with the 5% required earlier. They can issue security receipts for the remaining amount, which can be redeemed at a later date.
“While the final price of the stressed asset depends on the economic value of it, we would still expect an average 50-60% discount on the book value. However, banks keep pushing for a higher rate, which is unacceptable to us,” said the ARC chief.
Over the last six months of financial year 2015-16, banks had taken a liking to the strategic debt restructuring (SDR) route offered by the RBI, where they could convert part of a stressed company’s debt into majority equity and asset management control. The norms allowed the lenders 18 months before they could find a suitable buyer and continue with standard asset provisioning on these cases.
Banks were then involved in conversations with many investors in these cases for months. But the unwillingness of bankers to take a hit on their books means that no deals have closed so far.
Bankers blame the lack of support from the government and central vigilance agencies when it comes to taking hard decisions on valuation on stressed assets.
“There is no central mechanism to figure out the true value of a stressed asset independently. This means that we have to depend on valuations that are either considered too steep or too cheap. If we go too cheap, there will be a lot of questions by vigilance agencies, years after the banker involved has retired,” said a second public sector banker, also on the condition of anonymity.
“In such a situation, it suits a banker not to take any major decision and rather sit on the asset, till things work themselves out,” the second banker added.