The Hindu Business Line : Banks prefer to invite bids for selling NPAs

This year, some of the banks that put their substandard assets on sale, including the public sector Canara Bank and Central Bank of India, found the response lukewarm.

SBI associate banks made it clear that they were not in a hurry to sell the NPAs. The State Bank of Mysore Managing Director, Mr Dilip Mavinkurve, said, “There is no haste. We will sell it only if the prices are attractive.”

Public sector bank officials said they were not prepared to sell on the terms set out by Asset Reconstruction Companies. Accordingly, some banks, including the SBI associates, have chosen to take the bid route for putting their NPAs on sale. Almost all the public sector banks have also taken a similar stand. Banks have chosen to invite bids from the asset reconstruction companies or any financial institution prepared to take over the assets. Officials said that this would allow the banks to obtain lowest discounting on the assets, unlike in the past.

Asset reconstruction companies in the past had sought discounting rates as high as 20-25 per cent over the market value of the assets. Besides, the payments are staggered anywhere between five and seven years. Banks are currently paid in the form of security receipts. As a result, some of the public sector banks are insisting on cash payments, as opposed to security receipts.

The reluctance to sell the assets at high discounting rates also stemmed from the comfortable liquidity situation and equally comfortable bottomlines. Besides, the officials said, what also helped the banks to stave of high provisions for the last financial year were the series of loan restructuring packages initiated by the Reserve Bank of India and the corporate debt restructuring programmes. The restructuring has left most banks with a comfortable balance-sheet.

High stress level

However, some banks were keen to clean their books off some of the commercial realty assets. This was in view of the high level of stress associated with them. Officials said that though the assets were backed by underlying mortgages, loan to value ratios were sinking in some of the commercial real-estate portfolios. This was because the market value of the underlying assets has dropped, from the date of loan.

In many cases, the loan-to-value (LTV) ratio has dropped below the prudential level of 1.5 times. Under the current guidelines, banks are expected to maintain physical asset coverage of at least 1.5 times (150 per cent) the loan value. Normally, as loans are amortised, the LTV ratio tends to rise. A falling LTV, however, implies a depreciation in the value of the asset. Under international practices, banks normally tend to ask the borrower to maintain increased margins in the event of sharp deprecation in the value of the underlying assets.

In the current situation, though the LTV ratio had dipped to about 1.1 times there was little scope to increase the margins. This was in view of the high levels of loan delinquencies in the real-estate sector, the bank officials said. Consequently, they were left with little alternative other than treating the assets as non-performing in the first instance. A loan is treated as a substandard asset if the debt servicing is overdue for more than 90 days. Bankers said that in some of the commercial realty assets, the overdues were already being treated as substandard assets.

Accordingly, banks would prefer to clean up their books by liquidating the assets. But even here the public sector banks stood firm on the bid route. Mr Mavinkurve said, “Unless the discounted prices are close to the reserve prices, there is no question of selling them.” The reserve prices are fixed on the basis of recommendations set by two independent valuers. Banks reckon that by selling the assets, they would be able to further beef up their Tier-I capital for meeting their credit requirements during the peak season.

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