Mumbai: Banks have stepped up their loan recovery efforts and sought bids from asset reconstruction companies (ARCs) for their bad loans, especially those that have few chances of being recovered.
This comes at a time the Reserve Bank of India (RBI) has identified at least 12 stressed accounts for starting bankruptcy proceedings against defaulters using powers granted to the central bank under a 5 May ordinance amending the Banking Regulation Act.
Andhra Bank, Allahabad Bank, and United Bank of India (UBI) have put on the block non-performing assets worth over Rs6,750 crore, according to tenders posted on the websites of the banks. A few other banks may join the effort.
Last week, State Bank of India concluded the bidding process related to the sale of around Rs1,471 crore in bad loans. The bank is in the process of evaluating the offers, a person close to the development said on condition of anonymity.
“The trend is positive because it keeps the resolution process ongoing, especially when the recovery from the big-ticket loans is yet to gather momentum,” said Saswata Guha, a director at Fitch Ratings.
Indian banks are sitting on a stressed asset pile of around Rs10 trillion. Industry experts said the final outcome of these sales will also help gauge whether the revised norms of the RBI, in effect since 1 April, are a deterrent for using the ARC route for bad-loan resolution.
From the beginning of this fiscal, if a bank invests in more than 50% of security receipts created against the sale of its own stressed assets, it has to set aside more money as provisions. From 2018-19, this threshold of 50% will be reduced to 10%.
Bankers said they are keen on all-cash deals for their stressed assets, but given the capital-starved asset reconstruction industry, most deals are priced under the 15:85 rule. Here, ARCs give 15% of the net asset value as upfront cash and issue security receipts to cover the rest of the amount.
A majority of the accounts on sale are those with outstanding balance of below Rs100 crore and have remained as non-performing assets (NPAs) for at least four years, officials at Andhra Bank, Allahabad Bank and United Bank said, requesting anonymity.
While bankers say that it is easy to sell small-value accounts as the haircut, or the sacrifice banks have to make for selling NPAs, is smaller, ARCs have different views.
Given the vintage and size of the assets, it is unlikely that ARCs would buy the entire bad loans on offer and instead opt for cherry-picking.
“Recovery in such accounts is difficult and in most cases, the associated legal and other costs do not bode well if you keep in mind the expected recovery,” said the head of a leading ARC, which plans to participate in evaluating the NPAs on sale. This person requested anonymity.
ARCs have played an active role in the past in disposal of bad loans owed by small and medium-size enterprises and even mid-corporate entities, said Fitch’s Guha. “But for larger accounts, their appetite may be constrained by their limited individual balance sheets,” he added.
As of the end of March, India had 23 ARCs certified by RBI.
As per a report released in April and prepared jointly by the Associated Chambers of Commerce and Industry of India, Society of Insolvency Practitioners of India, and Edelweiss Asset Reconstruction Co. Ltd, about Rs2.44 trillion of gross bad loans have been sold to ARCs so far.