Restructure Of Bad Loans -By Danendra Jain 19.03.2015
I have been writing on pathetic position of Bank's Asset for last five years and more . Assets of bank are not good but it is shown as good by using tools of restructuring of loans, rephasing of loan or by writing off of loans or by sacrificing huge amount in compromise settlement with bad borrowers .But such unethical ways are boon for all.
Latest position on this front is that banks are moving from bad to worse. Now there is immense pressure from Ministry of Finance on Chiefs of each public sector bank to reduce Non Performing Assets and stressed assets , to increase profitability of bank and to arrange for required capital at their own.
Unfortunately banks due to many avoidable or unavoidable reasons cannot recover the money from bad borrowers or from ill-motivated wilful defaulters . I do not want to discuss the same every now and then . The reasons are well known to all regulating agencies as well as to bank officials.
It is the need of bankers to restructure stressed loan so that none from MOF or from RBI or from media can point out accusing fingers towards Bank's quality of performance and investors continue to invest in bank's share.
It is not important for bankers or for clever, selfish and corrupt politicians ruling the country that money is to be recovered from bad borrowers, the important for bankers as well as politicians is to save skin from MOF and investors who trusted banks. And the most important and key reason behind large scale restructure and writing off of loans is that bank officers want safe exit from bank and early promotion to higher position by hook or by crook.
And the automatic benefit which is likely to accrue to top officials by way of such manipulation is large incentive top officials will get in cash from the government for charming balance sheet and for attractive dividend they give to government. There is proverb in Marwari group"hing lage na phitkari, rang choukho aye"
This is why companies like Bhusan Steel has not to do much exercise for rephrasing and restructure of their bad accounts, it is bankers who want not to consider advance to the tune of Rs.40000 crore as NPA and not to damage their future.
There are thousands of accounts like that of Bhusan Steel which are likely to be restructured in the current quarter to artificially improve the health of sick banks. It is more needed for bad bankers and less needed for bad borrowers. It is a win -win position for all concerned , if by hook or by crook, by legal or illegal methods , bad loans are considered as good assets.Top Officials of bank:
If they declare all bad accounts as bad , there will be multiple rise in volume of bad assets, they will need to make higher provisions for bad loans, there will be lesser profit , they will need more capital and so on. As a consequence , MOF will fire them and as a result their mental peace will be disturbed, their retirement will become unpleasant and they will not get post retirement job from GOI. They will face disciplinary action or punishment for irregularities and malicious work they committed during their working in bank. As such it is good for Chiefs of Banks to opt for free restructuring of all bad loans or write them off
Junior Officers, Credit Officers , Branch Head, Regional Head And Zonal Head:
All will get quick promotion,higher cash incentive and cream posting if they artificially , rightly or wrongly treat all assets as standard. On the contrary , if they become rigid on telling spade a spade, their survival , their family life, their career , their income, their prospect of earning bribe in cash or in kind, their image among bad customers and higher officials,their annual appraisal reports all will be adversely affected.
RBI Officials, Auditors and Vigilance Officers.:--
If auditors become rigid on treating all bad assets of banks as bad asset, they will not get job of auditing in banks in future. Auditors who do not obey orders of bank officials are blacklisted by banks as well as by business men. In this way it is direct loss to their income and attack on their family comfort and mental peace. Therefore they think it wise to give certificate of good health to even bad accounts. RBI officials and vigilance officers spend luxurious life if all accounts are good and they need not visit branch after branch and bank after bank to carry out inquiry and find out culprit or make exercise for rehabilitation of sick industry.
Ministry of Finance and Government of India. :-
They will say with proud that banks in India are safer than other countries. Media will not ask humiliating questions. Rating agencies will not create headache for them by downgrading the rating. They will not need to arrange for infusion of capital in banks if they go sick due to burden of bad loans. Politicians who looted banks for their families and friends and for vote bank will not face any action . And the most important is that GOI will more from banks by way of tax and dividend.
Industrialists and business men:-They will get more and more loans if their existing loans are not considered bad. They will lead a luxurious life taking more and more loans, they will accumulate more and more properties in the name of their relatives. And if their loot crosses the limit , they will pray for compromise or write off of loans and thus save themselves from pain of advocates and court cases.
Businessmen like Satyam Computers know how to book artificial profit and how to present attractive balance sheet and for this purpose they are always ready to pay attractive fees to Chartered Accountants. In this way, not only they will get more loans but even auditors will earn more and more money. It is beneficial for auditors to prepare good Balance sheet for borrowers which not only earns more fees from business men but from banks also. It is just like killing two birds from one stone.
Investors, Depositors ,shareholders and all stake holders in public sector banks:
If banks book all assets or major portion of assets as standard, and show lesser volume of bad assets, banks will earn more and more profit, pay more and more dividend and price of shares of PS banks will go up and up. For this, they always need to restructure bad assets because it is not easy in India to recover loan from bad borrowers either directly or by legal course of action. As such process of restructure is a winning proposition for banks as well as for investors, shareholders, and all stake holders.
Architects, Advertisers, valuers of property who give valuation certificates for mortgageable properties to avail loans from banks of loan seekers , Advocates who legal opinion of good or bad property all get handsome fees for preparation of reports as per whims and fancies of bank officials and borrowers. If banks earn good profit rightly or wrongly, banks spend lavishly on advertising and hoardings. IN this way not only advertises earn more , even newspapers and vendors who prepare banners and hoarding get more business.
Latest position on this front is that banks are moving from bad to worse. Now there is immense pressure from Ministry of Finance on Chiefs of each public sector bank to reduce Non Performing Assets and stressed assets , to increase profitability of bank and to arrange for required capital at their own.
Unfortunately banks due to many avoidable or unavoidable reasons cannot recover the money from bad borrowers or from ill-motivated wilful defaulters . I do not want to discuss the same every now and then . The reasons are well known to all regulating agencies as well as to bank officials.
It is the need of bankers to restructure stressed loan so that none from MOF or from RBI or from media can point out accusing fingers towards Bank's quality of performance and investors continue to invest in bank's share.
It is not important for bankers or for clever, selfish and corrupt politicians ruling the country that money is to be recovered from bad borrowers, the important for bankers as well as politicians is to save skin from MOF and investors who trusted banks. And the most important and key reason behind large scale restructure and writing off of loans is that bank officers want safe exit from bank and early promotion to higher position by hook or by crook.
And the automatic benefit which is likely to accrue to top officials by way of such manipulation is large incentive top officials will get in cash from the government for charming balance sheet and for attractive dividend they give to government. There is proverb in Marwari group"hing lage na phitkari, rang choukho aye"
This is why companies like Bhusan Steel has not to do much exercise for rephrasing and restructure of their bad accounts, it is bankers who want not to consider advance to the tune of Rs.40000 crore as NPA and not to damage their future.
There are thousands of accounts like that of Bhusan Steel which are likely to be restructured in the current quarter to artificially improve the health of sick banks. It is more needed for bad bankers and less needed for bad borrowers. It is a win -win position for all concerned , if by hook or by crook, by legal or illegal methods , bad loans are considered as good assets.Top Officials of bank:
If they declare all bad accounts as bad , there will be multiple rise in volume of bad assets, they will need to make higher provisions for bad loans, there will be lesser profit , they will need more capital and so on. As a consequence , MOF will fire them and as a result their mental peace will be disturbed, their retirement will become unpleasant and they will not get post retirement job from GOI. They will face disciplinary action or punishment for irregularities and malicious work they committed during their working in bank. As such it is good for Chiefs of Banks to opt for free restructuring of all bad loans or write them off
Junior Officers, Credit Officers , Branch Head, Regional Head And Zonal Head:
All will get quick promotion,higher cash incentive and cream posting if they artificially , rightly or wrongly treat all assets as standard. On the contrary , if they become rigid on telling spade a spade, their survival , their family life, their career , their income, their prospect of earning bribe in cash or in kind, their image among bad customers and higher officials,their annual appraisal reports all will be adversely affected.
RBI Officials, Auditors and Vigilance Officers.:--
If auditors become rigid on treating all bad assets of banks as bad asset, they will not get job of auditing in banks in future. Auditors who do not obey orders of bank officials are blacklisted by banks as well as by business men. In this way it is direct loss to their income and attack on their family comfort and mental peace. Therefore they think it wise to give certificate of good health to even bad accounts. RBI officials and vigilance officers spend luxurious life if all accounts are good and they need not visit branch after branch and bank after bank to carry out inquiry and find out culprit or make exercise for rehabilitation of sick industry.
Ministry of Finance and Government of India. :-
They will say with proud that banks in India are safer than other countries. Media will not ask humiliating questions. Rating agencies will not create headache for them by downgrading the rating. They will not need to arrange for infusion of capital in banks if they go sick due to burden of bad loans. Politicians who looted banks for their families and friends and for vote bank will not face any action . And the most important is that GOI will more from banks by way of tax and dividend.
Industrialists and business men:-They will get more and more loans if their existing loans are not considered bad. They will lead a luxurious life taking more and more loans, they will accumulate more and more properties in the name of their relatives. And if their loot crosses the limit , they will pray for compromise or write off of loans and thus save themselves from pain of advocates and court cases.
Businessmen like Satyam Computers know how to book artificial profit and how to present attractive balance sheet and for this purpose they are always ready to pay attractive fees to Chartered Accountants. In this way, not only they will get more loans but even auditors will earn more and more money. It is beneficial for auditors to prepare good Balance sheet for borrowers which not only earns more fees from business men but from banks also. It is just like killing two birds from one stone.
Investors, Depositors ,shareholders and all stake holders in public sector banks:
If banks book all assets or major portion of assets as standard, and show lesser volume of bad assets, banks will earn more and more profit, pay more and more dividend and price of shares of PS banks will go up and up. For this, they always need to restructure bad assets because it is not easy in India to recover loan from bad borrowers either directly or by legal course of action. As such process of restructure is a winning proposition for banks as well as for investors, shareholders, and all stake holders.
Architects, Advertisers, valuers of property who give valuation certificates for mortgageable properties to avail loans from banks of loan seekers , Advocates who legal opinion of good or bad property all get handsome fees for preparation of reports as per whims and fancies of bank officials and borrowers. If banks earn good profit rightly or wrongly, banks spend lavishly on advertising and hoardings. IN this way not only advertises earn more , even newspapers and vendors who prepare banners and hoarding get more business.
BRIEF-State Bank of India sold loans worth 45.1 bln rupees to ARCs in Q4--23.05.2015
May 22 State Bank Of India says
* Added 118.85 billion rupees to restructured loans in Q4
* Sold 45.10 billion rupees worth loans to asset reconstruction companies in Q4
My Observations on SBI financials for the year 2014-15
SBI has restructured loan aggregating to Rs11885 crore in fourth quarter and thus saved provision by Rs.1188 crore roughly. In addition to it, SBI has sold bad debts valued Rs.4510 crore to ARC in the last quarter and shortfall of Rs.2800 crore approx has been amortised for two years. Roughly Rs.600 crore has been accounted for in Profit account of the year 2014-15 and rest Rs.2200 crore approx has been postponed for next financial year 2015-16. Volume of write off of bad loans and sacrificing of principal and interest on big amount compromise settlements is still unknown.
For this purpose RBI changed the rule of provisions at the fag end of financial year to help so called strong banks like SBI to come out of crisis. SBI took advantage of this amendment and shortfall in sale proceeds has not been fully accounted for in the financial year 14-15.
This is obviously a case of legal manipulation of financials and postponing the crisis for next year so that current CMD may get safe and respectful exit and retirement from Bank and hopefully may elevated as RBI Dy Governor. It is not SBI but all so called strong banks have manipulated the financials in the same way.
I therefore make an appeal to financial experts to make a through analysis of financials of SBI to find out whether there is actually cash recovery and upgradation of bad account or simply fraud with investors, taxpayers, depositors and borrowers of the bank. I do not trust and do not accept the claim of SBI that they have arrested slippages by concerted recovery from bad borrowers. Rather It will be appropriate to say that volume of hidden NPA is many times more than what has been declared by banks.
It is desirable to point out here that ,for last three consecutive years 2010-11 to 2013-14 gross NPA of SBI continued to rise . All of a sudden this year SBI reduced Gross and Net NPA perhaps without proportionate actual cash recovery. I hope RBI and SEBI will make deep scrutiny of the financials of all PSBs so that investors are made aware of truth of banks they bank with. Here It is to be noted that return on advances has gone up slightly from 8.47% in 13-14 to 8.64% in 14-15 whereas return on investment has come down from 8.00% in 13-14 to 7.49% in FY 14-15.
CMD of public sector banks may retire by inflating profit and sharing dividend with investors and may get award from Ministry of Finance in form of incentives. But sooner or the later when bomb of bad debts will explode , it is customers of bank, staff of bank, investors of banks who will have to bear the impact of loss to bank. RBI and GOI should stop unhealthy practice and try to make bankers bold enough to say spade a spade. Bad debts are hidden for some time . But during this period bad borrowers dispose off the assets and banks suffer loss. so that bad debts are recovered in time . It is necessary to recover the money from bad borrowers in tie and without loss of time. Otherwise banks will loss heavy money as they are going to loss from defaulting customers like King fishers, Zoom Developers, GTL etc.
Click Here To Know How Restructuring Of Bad Loans Helped SBI To Inflate Profit And To reduce NPA
SBI results: Restructured loans spook investors-Livemint 23.05.2015
SBI investors realized that the headline improvement in bad loan numbers hid other, less pleasant details
However, the bank sold Rs.4,510 crore of bad loans to asset reconstruction companies. Its write-offs totalled Rs.4,874 crore in the March quarter. That is a continuation of a trend of write-offs close to Rs.5,000 crore every quarter for the past year-and-a-half.
More importantly, the bank restructured Rs.11,800 crore of loans in the fourth quarter, double the Rs.5,500 crore it had guided for in February. To be sure, restructurings were anyhow supposed to increase since fresh recasts from this financial year will attract a higher rate of provisioning. A good part of this restructuring was pre-emptive since “no one wants the NPA tag”, said Arundhati Bhattacharya, SBI’s chairperson, at a press conference. There’s another Rs.2,625 crore of assets waiting to be recast in the current quarter under the Reserve Bank’s new window.
Leaving aside restructurings, the main question for investors is whether this trend of falling slippages is sustainable in an environment where corporate earnings show no sign of a pickup and both consumer and investment demand remain sluggish. Even in the case of recast loans, about one-fifth slip into the NPA category, as SBI’s own numbers show.
Sale to ARCs will continue; economy yet to turnaround: SBI-Money Control
The state-owned bank’s CDR restructuring pipeline currently stands at Rs 2,625 crore.
Q: Your loan sale to asset restructuring companies (ARCs) was somewhere around Rs 4,500 crore. Will this continue in the next quarters as well?
A: Sale to ARCs will depend. We will continue to sell. I am not saying that we are going to stop sales. This time the sale number went up because there were two chunky sales. Given the fact that RBI has still given us the option of spreading the loans over 8 quarters, if we find that there are some accounts where we believe resolution will take a lot of time or a lot of effort then we will definitely consider ARC sales.
RBI eases rules for sale of bad loans to ARCs-The Hindu -22 March 2015
Banks were allowed this provision only for bad loans sold to asset reconstruction companies up to March 2015.
In a much-needed relief to stressed banks, the Reserve Bank of India (RBI) has decided to ease the provisioning norms relating to loses arising out of sale of bad loans to asset reconstruction companies (ARCs).
According to the existing norms, if the sale of bad loan to asset reconstruction companies is at a price below the net book value (NBV) (i.e., book value less provisions held), the shortfall could be debited to the profit and loss account over a two-year period subject to necessary disclosures. However, banks were allowed this provision only for bad loans sold to asset reconstruction companies up to March 2015. The RBI has now allowed banks to spread losses on sale of bad loan to such ARCs up to March 2016.
Saturday, August 9, 2014
Selling Bad Debts TO ARC Made Difficult
Now, banks cannot offload bad loans that easily-Hindu Business Line-8th August 2014
August 7, 2014:
Public sector banks, of late, have been aggressively selling their bad loans to asset reconstruction companies (ARCs), in a bid to reduce their pile of bad loans. But this may come to a standstill after the RBI’s new directive to securitisation and reconstruction companies. Here’s why.
Sale of bad loans to ARCs gained momentum in 2013-14 mainly because banks were able to obtain better prices for these sales. ARCs which usually offer to take the loan off the banks’ books at a discount, were paying 55-60 per cent of the value of loans, as against just 30 per cent in the past.
This significant jump in pricing was possible due to a shift in deals from the cash route to the security receipts (SR) route. So instead of taking an upfront cash payment, banks were willing to accept delayed payment, in the form of ‘security receipts’ or SRs. ARCs were thus making a down payment of minimum 5 per cent and the balance 95 per cent was paid to the bank against the SR.
But the RBI has now raised the bar, by demanding a minimum of 15 per cent down payment from ARCs. This is likely to dissuade ARCs from offering a better price, since they will now have to make a higher upfront payment.
But that seems to be the intent of the RBI—to ensure a realistic pricing of the assets.
“ARCs were able to pay a higher price of Rs. 60-75 (for Rs. 100 worth of bad loan) against Rs. 30 earlier, because only 5 per cent of this was to be paid in cash. This was leading to unrealistic pricing of assets. The RBI clearly wants to address the issue before it gets out of hand,” says Nirmal Gangwal, Founder and MD of corporate debt restructuring advisory firm, Brescon Corporate Advisors.
Both banks and ARCs are mostly concerned about their balance sheet, and are not putting in the effort to rehabilitate stressed assets, he adds.
When banks sell to ARCs, they stop recording the assets as bad loans in their books, and do not have to make provision for them. They instead record the SR portion as investments in their book, which is rated every year by rating agencies. Based on the amount expected to be recovered on these loans, banks need to do a mark-to-market provisioning every year.
“Recently, banks were able to sell for a price higher than the book value of the loan (net of provisions). This additional amount was used to set off against other bad loans,” says Gangwal.
The RBI’s latest directive will put a stop to such unrealistic pricing. Among other tweaks, the RBI has now asked reconstruction companies to disclose the basis of their valuation if the asset is bought at a price higher than the book value.
For ARCs, who are already starved for capital, the higher cash payment is likely to impede their acquisition of assets from banks.
In 2013-14, for the first time in history, close to Rs. 50,000 crore assets were offered by banks to these ARCs. In 2012-13, this figure was only Rs. 12,000 crore.
“There may be some slowdown in the pace of asset sales, particularly for ARCs who do not have enough resources. We are better placed than others to manage the additional cash payment”, says P Rudran, Managing Director and CEO, ARCIL, the first ARC to be set up in India.
But he feels that the RBI’s directive is in the right direction and will ensure that ARCs have more skin in the game.
“The latest move by the RBI will ensure that the valuations are more realistic, there is more discipline in pricing and will also improve disclosures”, says Rudran.
But the profitability of ARCs may get impacted.
Earlier ARCs were charging management fees varying between 1-2 per cent on the outstanding SRs i.e. face value. The SRs are required to be rated by a rating agency after the initial planning period (period allowed for ARCs to formulate a plan for realization of non-performing assets). The rating will indicate the net asset value (NAV) of SRs. The RBI has now directed that the management fee be calculated on the NAV rather than on the SR amount.
“This means that if the rating goes down, let us say below the face value, then there will be a reduction in the management fee paid to the ARC,” says Rudran.
The planning period has also been reduced from 12 to 6 months. This means that the first rating has to be done after 6 months.
ARCs lap up half of bank bad loans on sale-DNA-01.08.2014
Of these, ARCs have already bought about Rs 15,000 crore worth of loans. These include retail loans, mid-corporate and large corporate accounts. Even loan accounts that are referred for corporate debt restructuring (CDR) are now being showcased to ARCs for sale.
Electrotherm (India) Ltd, an Ahmedabad-based engineering company, which was a CDR account with a loan outstanding of Rs 3,200 crore, is now up for sale to the ARCs.
Banks like State Bank of India (SBI) have been selling off accounts that are due for 60 days and it is being directly undertaken by the mid-corporate group without being routed to the stressed assets management group (SAMG).
The other large corporate accounts that got sold off to the ARCs in the recent past were Hotel Leelaventure and Bharati Shipyard. ARCs buy the assets at 10-20% discount and make profit by selling them.
Indian Overseas Bank sold off Rs 1,368 crore worth of bad loans to ARCs, received a 5% cash back on these assets, which can be written back to profits under new RBI guidelines.
Other banks like Bank of India sold off during April-June Rs 1,700 crore of four or five accounts, which include Rs 80 crore of prudential write-offs, Rs 890 crore of technical write-offs and some from the standard accounts (SMA II).
P Rudran, chief executive officer and managing director of Asset Reconstruction Co of India Ltd (Arcil), said, "Banks have showcased Rs 30,000 crore worth of bad loans of small and medium enterprises, retail and mid-corporate accounts."
Punjab National Bank, State Bank of India, Oriental Bank of Commerce, Indian Overseas Bank, Bank of Baroda and Bank of India are some of the lenders that have put their bad loans on sale.
A fresh set of guidelines put out by RBI has allowed banks to sell their bad loans to ARCs and write back the proceeds to their P&L accounts.
Under the guidelines, when an asset of Rs 100 crore is sold off to an ARC, about 5% of this is given back to the bank as cash back which can be directly written back to the P&L account.
The remaining consideration is issued as security receipts to the banks in lieu of payments that ARCs will make over a period of eight years based on their recovery.
http://www.dnaindia.com/money/report-arcs-lap-up-half-of-bank-bad-loans-on-sale-2006948
Private banks shun ARC route to offload bad loans -The Hindu 27 April 2014
Even as public sector banks have made a beeline to dispose of their bad loans to asset reconstruction companies (ARCs) in the March quarter, private banks are not only unenthused in adopting this route, but have virtually shunned this.
State-run banks, which are sitting on a mountain of bad loans, have sold as much as over Rs. 10,000 crore to ARCs in the March quarter, led by State Bank of India’s close to Rs. 4,000-crore asset sale, a first for the nation’s largest lender in its over-200-year history.
In the December quarter, SBI had reported a gross NPA of 5.3 per cent or Rs. 67,800 crore.
As against this, its largest private sector counterpart ICICI Bank had a gross NPA ratio of 3.03 per cent in the three months to March, but sold not a single penny to ARCs, its managing director and chief executive Chanda Kochhar said.
HDFC Bank deputy managing director Paresh Sukthankar said the bank’s sale to ARCs was around Rs. 6 crore, which is “nothing meaningful”, while Yes Bank sold Rs. 12 crore.
For Axis Bank, the third largest private sector lender, the sale to ARCs during the March period, which generally witnesses such sales, was minimal, according to its management.
In stark contrast, the state-run lenders have reportedly sold over Rs. 10,000 crore of assets to the ARCs in March alone, due to a variety of reasons, including a push by their majority owners.
This may be partly due to the higher proportion of non-performing loans which the state-run banks carry.
According to rating agency ICRA, the gross NPAs ratio for the country’s 40 listed banks stood at 4.1 per cent as of December 2013.
As per RBI estimates, the same for the entire system as a whole had stood at 4.2 per cent as of September 2013 and it expected the same to go up to 4.6 per cent by September 2014 and then improve a bit to 4.4 per cent by March 2015.
Within that, the RBI said the state-run banks will be the worst affected. The public sector banks’ NPAs will be at 4.9 per cent by March 2015 while the same for the private sector is projected at 2.7 per cent.
Meanwhile, some experts also question if the quality of the securities which the banks carry against a loan have a role to play in this trend. Generally it is assumed that private banks are much more diligent while granting a loan and insist on better quality collaterals before disbursing, which a public sector lender may lack.
‘The challenge is to induce banks to sell bad loans to us’ -21st December 2013-Hindu Business Line
Sometimes, deals fall through when the price offered by asset reconstruction companies varies significantly from that expected by banks. P. RUDRAN, MD AND CEO, ARCIL
As the non-performing assets of banks mount, there is a readymade option to lighten up this burden in the form of Asset Reconstruction Companies (ARCs). They were formed to buy out distressed assets from banks and financial institutions and sell them at a reasonable price. But they haven’t proved effective. Recently, the RBI has proposed new guidelines on early recognition of stressed assets, and fair recovery for lenders and investors. The central bank has also sought better functioning of ARCs. We spoke to P. Rudran, MD and CEO, Arcil — India’s first ARC — for an update.
Excerpts:
What is the role of an ARC and how does the process work?
ARCs were formed under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, to help banks manage and recover NPAs by securitising financial assets and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the Court. The Debt Tribunal or civil courts present earlier were not very effective and fast. So, ARCs were set up to enable faster recovery without the intervention of the court.
Arcil was the first ARC formed under the Act. Initially, assets were transferred to us against the security receipts (SRs) we issued to the banks. However, in 2006 the RBI mandated ARCs to invest at least 5 per cent in the SRs issued to enable active participation in the recovery of bad loans. Currently, the process is something like this. When we agree to acquire assets from the banks and financial institutions at a given price, there is an assignment agreement which is signed with the selling bank. One or more trusts are set up by the ARC for housing these assets. The trust issues SRs to the selling banks as well as other investors, such as qualified institutional buyers (QIBs).
So, typically, you step into the shoes of the bank?
Yes, all the rights and privileges that banks have will be applicable to us. If the case is already in Debt Recovery Tribunal (DRT), then we can substitute our name or we can ourselves file recovery suit in DRT if the bank had not already done it. However, there is one limitation. The maximum resolution period allowed by the RBI is five years, which can be extended up to eight years, if need be, with the approval of the Board. Banks can take any amount of time to recover bad loans under various routes. Under the Trust structure, if ARCs do not resolve the NPAs within the maximum period of eight years, the investment has to be written off. However, the resolution process will continue.
With increase in NPAs in the banking system, your business must have been very robust?
Not really. In the last two-three years, banks have not used this tool very effectively, though the current year is witness to the vast improvement in the offer for sale of NPAs by the banking system. In 2012-13, we acquired around Rs. 740 crore of assets which we plan to increase to Rs. 2,000 crore in 2013-14. Of late, banks have been coming up with more assets to sell, but conclusion of deals is still not encouraging.
What has been the main reason behind banks’ reluctance to use this tool?
The main issue has been with the pricing. We (ARCs) do our own due diligence and value the security on a time-based recovery. This will differ depending on our assessment of the recoverable value of the underlying asset. Today, the challenge is to induce banks to sell assets to us. ARCs have to demonstrate that they are able to recover the amount and redeem SRs in their favour.
So, once the amount is agreed, you make an upfront payment?
There are two ways in which this is done. One is an outright cash purchase, under which the agreed amount is paid upfront. Two, where an SR is issued, both the banks and the ARCs decide on the sharing proportion. Say, for instance, the ARC decides to invest 10 per cent and, for the balance 90 per cent, SRs are issued to the bank.
When the amount is finally recovered, the balance amount is redeemed against the SR. In the above case, if the agreed amount is Rs. 20 lakh, then Rs. 2 lakh is invested upfront, and for the balance Rs. 18 lakh, an SR is issued to the bank or any other QIB. Once the loan is recovered, the balance Rs. 18 lakh is redeemed to the bank after netting off expenses, management fees, and so on. If there is an upside, it is shared between the SR holders and the ARC on an agreed proportion.
In 2012-13, two-thirds of the assets were purchased through the cash route and the balance through SRs. This year, we are increasingly seeing more purchases through the SR route.
What happens if the recovered amount is more than Rs. 18 lakh?
Then we share the additional amount in the proportion decided by us. Typically, investors in SRs get 80 per cent and ARCs retain 20 per cent. Usually, if we have invested a higher proportion initially, then we take a higher share. This share will change from case to case.
Which are the sectors that pose a challenge to recovery?
Power, and iron and steel sectors are issues. However, we do not take large infrastructure projects anyway; we take smaller SME cases.
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