The Hindu Business Line : Discounts on NPA take-outs falling

The high provisioning has led to a large gap between the net NPA in the domestic banking sector at less than five per cent and high gross NPA at close to five per cent. For reducing the gap, bankers' options were limited to sell the NPAs to the Asset Reconstruction Company of India Ltd at steep discounts. Bankers had sold some of these NPAs at discounts as high as 60 per cent of the face value.

But the high discount regime has ended. Public sector Canara Bank's General Manager (Recoveries), Mr J. S. Vasan, said, "High discounts on NPAs are passe. Bankers have the option of making the recoveries themselves." This is already an option some of the banks are exercising, given the balance-sheet advantages. The advantages are that in loans completely written off, recoveries would go to the profit and loss account, boosting their respective profits.

But not all banks are holding on to gross NPAs, especially those that are already under capital pressure or those on the borderline of nine per cent. It was these banks that are out shopping for discounts. The opportunity for pushing down the discounts was created by the entry of more players into the stressed asset take-out market. IndusInd Bank and Kotak Mahindra Bank have also entered the fray for taking out stressed assets.

IndusInd Bank's Managing Director, Mr Bhaskar Ghose, said, "We have considerable experience in resolving NPAs, and therefore, intend buying out the stressed assets of other banks."

This chase for stressed assets has, in turn, pushed down discounts sharply to about 30 per cent. But there are other players waiting to enter the fray for buying out NPAs, especially after the Government relaxed the norms for foreign direct investment in the sector up to 49 per cent.

Among those planning a foray into the sector include Actis, formerly Commonwealth Development Corporation, and a clutch of foreign banks. In addition, the foreign institutional investors have also been permitted to buy out stressed asset portfolios, as part of their fixed-income portfolios in the form of security receipts. Said Mr Ghose, "This will bring down the discounts even further."

This competition was likely to rehabilitate a large portion of the NPAs amounting to Rs 90,000 crore, bankers said.

Despite this chase for stressed assets, there is still a considerable amount of cherry picking, bankers said. Takeout financiers are still choosy about the NPAs. Among the preferred categories are NPAs of corporates that are still up and running and those backed by fixed assets. Assets in these two categories command low discounts and generate profits for take-out financiers given the right restructuring package.

Besides, there are also categories of assets, classified as unsecured, but backed by personal guarantees of promoters/directors. However, it is in these categories of NPAs that settlements have taken place through the OTS (one time settlement) packages and recoveries have been high. The only assets that face complete write-offs are those backed by current assets.

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