Banks get cracking on bad loans as asset sales rise

Public sector banks have been blamed for piling up a mountain of bad loans and not doing anything about them. But the state-owned lenders seem to be shedding their inertia, judging by their actions in recent months.

Asset Reconstruction Company of India (ARCIL), the first entity set up to buy distressed assets from banks, reports that of late many public sector banks have come forth to sell assets of defaulters.

Indian Bank assigned assets worth about ₹670 crore to ARCs in 2013-14. UCO Bank assigned 133 NPA accounts worth ₹1,869 crore. Bank of India has sold ₹1,071 crore, while Canara Bank sold close to ₹700 crore of bad loans during the year. India’s largest bank, SBI, has been selling assets aggressively, reports suggest, concluding nearly ₹5,000 crore of asset sales. “In this fiscal year (2013-14), we acquired ₹4,400 crore worth of bad loans from banks. Last year, this figure was just ₹780 crore,” says P Rudran, Managing Director and CEO, ARCIL. And this may just be the tip of the iceberg. There are 14 other asset reconstruction companies in India, of which JM Financial, International Asset Reconstruction Company, Edelweiss, and Alchemist are quite active.

In 2013-14, for the first time, assets worth close to ₹50,000 crore were offered by banks to these ARCs. In 2012-13, this figure was only ₹12,000 crore.

But why are banks in a sudden rush to sell assets? One reason is the new reporting requirement that RBI has put in place from April.

A few months ago, the RBI had asked banks to identify and take early action on loans likely to turn bad, even if the borrower delayed servicing the loan by a month or two (the cut-off for recognition of a bad loan is 90 days). This has put pressure on banks with sizeable bad loans to take quick action to clean up their books. In 2013-14, the gross non-performing assets of all PSU banks went up by 37 per cent.

Banks are also taking advantage of the accounting leeway given by the RBI on such distressed-asset sales. The RBI had in January said that if banks sold assets to ARCs below their net book value, losses incurred could be spread over two years while reporting numbers. This helps banks show a higher profit. The offer is valid until March 2015.

“Usually banks come forward in the second half of the year to sell assets. This year we are seeing a lot of action in the first quarter itself,” says Rudran.

Asset sales are also picking up because banks are now able to obtain better prices for these sales.

“Earlier the price was less than 30 per cent of the value of loans, now it has improved to about 55-60 per cent,” says Rudran.

ARCs are able to offer a better price because banks are now willing to accept delayed payment, in the form of ‘security receipts’ or SRs. So, the ARC makes a down payment and when the amount is finally recovered, the balance is paid to the bank against the SR.

While two-thirds of the assets were sold for cash in 2012-13, most of the transactions used SRs in 2013-14, says Rudran. However, some banks prefer hard cash.

“If we sell assets to ARCs, we prefer to receive up-front cash payment, rather than go for the SR route, which would require us to do a mark-to-market on the investment every year. If the value comes down, then we will need to provide for the depreciation on such investments,” says KR Kamath, Chairman and Managing Director of PNB. But experts warn that banks’ recent willingness to sell distressed assets isn’t the end of the bad-loan saga.

The ₹50,000 crore worth of asset sales have to be viewed against total bad loans of about ₹2 lakh crore for listed public sector banks. And to induce banks to sell assets, ARCs need to demonstrate that they are indeed able to recover the amounts from the borrower.

Only then will banks finally be able to recover at least part of their earlier loans.

COMMENT NOW