Of sell-offs and write-offs

The Reserve Bank of India has been stepping up the pressure on public sector banks to come clean with their non-performing loans and stop kicking the can down the road by ‘restructuring’ them. One aspect of this problem that hasn’t received the attention it deserves is the sale of distressed loans to Asset Reconstruction Companies (ARCs). Public sector banks have been aggressively passing on their doubtful loans to ARCs in recent times to reduce the stress on their balance sheets. But taking them off the books does not mean the risks from these bad loans have vanished; banks will have to bear the loss of income in the event the loans turn irretrievably bad.

The sale of NPAs to ARCs has gained momentum in the last couple of years. From asset sales valued at about ₹1,000 crore in 2012-13, sales to ARCs jumped to about ₹18,000 crore in 2013-14. In the April-June quarter (2014-15), the number climbed further to ₹15,000 crore. The widespread perception is that better pricing for bad loans offered by ARCs has prompted banks to adopt this option aggressively. Instead of taking a bad loan off the books at a discount of 70 per cent or more, ARCs have recently been willing to accept them at between 55 to 60 per cent of the loan value. However, better prices, as it were, have come at a price. In an effort to expedite ARC sales, banks now accept delayed payments in the form of ‘security receipts’ (SRs). In effect, banks may receive as little as 5 per cent of the value as upfront payment, with the remaining 95 per cent promised through SRs. This form of sale may allow banks to stop recording the assets as bad loans and evergreen their balance sheets. But sales against SRs do not improve bank cash flows. Also, in the case of the loans not being recovered, banks may eventually end up bearing losses from default as well.

It was the presence of such risks that led the RBI to intervene in August and mandate a minimum cash payment of 15 per cent from ARCs for every asset sale. While this will ensure better cash flows to banks, it still does not address the entire problem. ARCs were originally set up under the Sarfaesi Act to enable faster recoveries without the intervention of courts. But in reality, the inefficacy of the Debt Recovery Tribunals (DRTs) have prevented ARCs from expediting recoveries. Most often, instead of adjudicating the matter, courts issue a stay order that delays the process further. It is time that both the RBI and the Centre work towards remedying the tardy legal and recovery process and ward off another looming crisis in the banking sector.

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