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Friday, Oct 22, 2004

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Banks step up NPA recovery efforts

C. Shivkumar

Bangalore , Oct. 21

BANKS have stepped up recovery efforts this year in a bid to reduce their gross non-performing assets (NPA) and improve their bottomlines.

Top banking sources said here that this year gross NPA recoveries were up by 40 per cent from the previous year. Some of the banks have already improved on their targeted recoveries.

The sources said that the average recovery of the banks was expected to be at least Rs 400 this fiscal, they added.

The improved recovery, they said, would contribute substantially to bottomlines for the current year and help offset the losses on account of depreciation of securities.

The 10-year YTM (yield to maturity) has risen from 5.1 per cent since the beginning of this fiscal year, to about 6.9 per cent resulting in hefty depreciation provisions.

Bankers said that recovery inflows would help them partially neutralise the depreciation.

Till the beginning of this year, banks had focussed on reducing the net NPAs. This implied making large provisions.

Currently, most banks have brought down their net NPAs to anywhere between 1.5 and 2.5 per cent.

The large provisions were made during the last two years, from profits realised out of treasury operations.

However, they said, with the profits from treasury operations declining, banks have chosen to step up recovery efforts.

The interest component of these recoveries would comprise part of the profit and loss account and the principal realised would be used to bolster their capital.

Bankers also said that the efforts were also partly driven by the fact that the tax exemptions available under Section 36 (viia) of the Income-Tax Act were close-ended. Under this exemption, provision up to 10 per cent of the NPAs was exempted from tax liabilities.

But this exemption was available only up to April 2005. Accordingly, banks had few alternatives to improving the recoveries, they added.

Also, some banks were beginning to opt for one-time settlements and sale of some stressed assets to institutions specialised in taking out NPAs, such as the Asset Reconstruction Company of India Ltd (ARCIL).

However, one banker said, "Any liquidation of stressed assets to ARCIL will depend on the pricing."

But pricing is likely to improve in the coming months, the bankers said. This was in view of the rising competition for taking out stressed assets.

Already some foreign funds have shown interest in taking out stressed assets at discounts as low as 25 per cent.

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