Lenders see one-time settlements boosting pace of NPA resolution

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Mumbai: Banks are betting on one-time settlements (OTSs) to boost bad loan recoveries as cleaning up their balance sheets through modes such as sale of bad loans and restructuring are not yielding anticipated results.

State Bank of India (SBI), Punjab National Bank and smaller lenders such as Bank of Maharashtra, among others, have seen improvement in recoveries through OTS, according to senior officials of these banks.

“Upgrades through RBI (Reserve Bank of India) restructuring schemes are only a handful. In large accounts, resolution is underway following the reference to National Company Law Tribunal (NCLT) for insolvency proceedings. At the same time, in NPA auctions, pricing difference often derails planned sales. So, whenever possible, we opt for OTS on the condition that the borrower’s proposal is acceptable,” a senior banker with a state-owned bank said, requesting anonymity.

For smaller lenders, accounts involved in OTSs are mainly from micro, small and medium enterprises (MSMEs), agriculture and retail sectors. Based on bankers’ estimates, for most lenders, OTSs form 50-55% of total recoveries, around 40% through sale of bad loans to asset reconstruction companies, and the remaining through filing of suits. This ratio may change once resolution of the 12 large cases, where recovery plans are being discussed at NCLT, are finalized.

“Compared to the previous year, recovery through OTS route has definitely improved. Like most banks, we are also targeting recoveries from SMEs. But there is good response from some of the mid-corporate borrowers,” said a senior SBI officer, who declined to be identified.

The bank has introduced an OTS scheme, which is non-discretionary and non-discriminatory. Here, eligible borrowers, with outstanding dues of as much as Rs25 crore, can apply till 31 October.

Accounts involved in OTS are those which have remained non-performing for over two years, according to bankers. These accounts are categorized as doubtful as lenders don’t expect any recovery from them, and have adequate provisions for any sacrifices lenders may have to make.

Banks approve OTS based on collateral security. The decisions are based on the board-approved policies and, in some cases, banks also take expert opinion from external parties to avoid scrutiny by vigilance authorities.

Borrowers are asked to repay a certain amount, usually 5-7%, upfront and the remaining over an agreed timeline.

Bankers said that since most of the accounts have adequate provisions, the settlements are not expected to impact the balance sheet.

According to Udit Kariwala, senior analyst at India Ratings, till the time OTS reflects in the overall recovery numbers, it is difficult to gauge the trend and what are banks benchmarking such recoveries against.

“Secondly, even if it is happening, it would be mainly low-value accounts and, hence, the amounts would be smaller. Most bad assets are stuck in large corporates, where OTSs look a difficult route for resolution,” he said.