The Hindu Business Line : Banks keen to offload NPAs to global funds

The possibility of lower discounts is making the takeouts attractive. Also, most banks believe that once the assets are taken out, some of the provisions could actually be written back.

Bangalore , Sept. 30

WITH the treasury boom petering out, banks have shifted focus to shrinking the gross non-performing assets (NPAs) on their balance sheets to generate profits.

In fact, several funds have already shown interest in taking out some of the loans. Bankers said that among the funds preparing to buy out the stressed assets, are CDC Capital Partners, Colony Capital, Cerebrus, Morgan Stanley, GE Cap, Shinsei Bank and Newbridge Capital. All these funds specialise in the rehabilitation of stressed assets and are active in other parts of Asia including China. Most of these entities are domiciled in some of the tax havens. The quantum of funds available for taking out stressed assets in India is estimated to be anywhere between $15 billion and $20 billion.

The total portfolio of non-performing loans with Indian banks and financial institutions is currently estimated at Rs 1,10,000 crore. So far, banks have focussed only on making large provisions for such NPAs. The large provisioning has ensured that the NPA coverage is over 70 per cent. Net NPA ratio for all the banks in the country is about 2.5 per cent. Most funds for provisions were created out of profits from treasury incomes during the last three years. Few banks were interested in pushing stressed assets to asset reconstruction companies during a softening interest rate regime.

However, the reversal in the interest rate situation has changed the situation considerably. Says Mr M. Balachandran, Executive Director, Bank of India, "We need to change focus to gross NPAs from net NPAs." The reversal implied that banks would have little profits from treasury for provisioning.

But another reason for the focus shift was that exemption under Section 36 (viiia) of the Income Tax Act ends in 2005. This section in the IT Act provides for tax exemptions on provisions made for NPAs, subject to a ceiling of 10 per cent up to 2005. As a result, bankers now want to offload the gross NPAs from their books to the best bidders. Mr Pankaj Wadhawan, Vice-President and Head of the Debt Structuring Group of Meghraj Financial Services India Ltd, "Funding and pricing are not big issues at all. The issue is who takes the haircut between the promoter and the lenders." Meghraj Financial is, in fact, in the process of putting together some of the funds and banks for stressed-asset takeouts.

But one of the main issues in the past, when takeouts were attempted, was the reluctance on the part of lenders to take the haircut. Bankers said that some of the asset reconstruction companies wanted high discounts for the takeouts. The discounts quoted were as high as 60 per cent for takeouts. At such high discounts, none of the banks was prepared to part with the assets, particularly in a softening interest rate regime.

Most bankers believed that the high discounts were mainly driven by the fact that there was little competition for distressed assets takeout. Therefore, most of them preferred the option of resorting to recoveries through the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act.

But pricing is no longer an issue. Mr Balvinder Singh Sangha, Director Financial Services of Ernst & Young, said, "Funds for taking out stressed assets would be comfortable with asset coverage figures of 120 per cent or even lower."

Currently, domestic banks and financial institutions provide loans, only if the physical asset cover is 150 per cent. This implied that the value of the asset would have to be at least 150 per cent of the loan amount.

Clearly, bankers said that the stressed loans were well collateralised. Hence, some of the international funds are prepared to take out assets are much lower discounts, bankers said.

It is, however, not only the possibility of lower discounts that are making the takeouts attractive. For most banks now believe, that once the assets are taken out, some of the provisions could actually be written back.

Principal recoveries would beef up the capital and the interest would make the profit and loss account look better.