The Hindu Business Line : NPAs in the shopping cart

ONE IS certainly witnessing winds of change in the banking industry. The SARFAESI Act of 2002 scared many a borrower out of his wits resulting in improved loan repayments and, to a certain extent, lesser non-performing assets (NPAs). Asset reconstruction companies were quickly incorporated that traded in NPAs. Enthused by the response, the Reserve Bank of India (RBI) has issued draft guidelines to create a secondary market in NPAs, permitting banks to trade amongst themselves in NPAs.

Procedure

The all-encompassing approval of the board is needed to commence trading in NPAs, prior to which banks would have to conceptualise an `NPA Purchase Policy' that would elaborate on, inter alia, the type of assets that would be traded in, their valuation and accounting policy.

One of the most crucial elements of the guidelines is that NPAs can be traded only on "non-recourse" basis — one cannot knock again on the doors of the selling bank in case the account does not behave itself properly. This has been put in ostensibly to derail the plans of corporates that sell of assets in March and buy them back in September in order that the capital adequacy ratio of the bank is healthy for the crucial date of March 31.

The guidelines go on to state that banks should ensure that subsequent to sale of the non-performing financial assets to other banks, they do not have any involvement with reference to assets sold and do not assume operational, legal or any other type of risks relating to the financial assets sold.

Consequently, the specific financial asset should not enjoy the support of credit enhancements/liquidity facilities in any form or manner. A bank can sell an NPA only if it has been able to tolerate it on its books for a period of two years while a purchasing bank should tolerate the NPA for 15 months before its formulates plans to resell the NPA.

90-day syndrome

By now we have got accustomed to the " 90-day syndrome" after which one is tagged with the NPA label. A purchased NPA can be classified as standard for this magic period. Subsequent to this, it is the performance of the account that would determine the asset classification.

In an interesting instruction, the RBI states that in case the sale of the asset is below the book value, the profit and loss (P&L) account is to be debited, while in case of a gain, the surplus is not to be splurged but used to meet the shortfall on other NPA accounts.

Exposure norms

The purchasing bank will reckon exposure on the obligor of the specific financial asset. Hence, these banks should ensure compliance with the prudential credit exposure ceilings (both single and group) after reckoning the exposures to the obligors arising on account of the purchase.

The draft guidelines would open up the securitisation industry in India by developing a secondary market for NPAs. Banks now have a choice to either take over the keys of the factory under SARFAESI or look for a buyer for the troublesome accounts.

With the Basel II norms not very far away, this guideline seems to be the commencement of many more to come to ensure that the transition to Basel II is smooth and eventless.

(The author is a Hyderabad-based chartered accountant.)

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