Money & Banking

Bad loan sales to asset reconstruction firms may drop this fiscal, say experts

| Updated on: Aug 26, 2014

Thanks to RBI tightening the norms and banks relying more on recoveries

Sale of bad loans to asset reconstruction companies (ARCs) by banks may come down this year as the Reserve Bank of India has tightened norms. According to experts, volume of sales to ARCs will fall in the next two quarters as ARCs are now required to put in more capital.

“Change in regulations could see fewer sales to ARCs now. Possibly it could de-grow. From the ARCs’ perspective, an upfront commitment of 15 per cent to banks will affect them and their asset buying from banks will depend on the funds they are able to mobilise,” said Karthik Srinivasan, a senior vice-president at ICRA.

He added that there would be near-term implications when it comes to any fresh acquisition as it would require ARCs to look at their borrowings and asset-liability management.

According to RBI data, loan sales to ARCs jumped four-fold during January-March 2014 (Q4 2013-14) at ₹12,710 crore, compared with ₹3,570 crore in the October-December quarter of 2013. Of these, public sector banks accounted for ₹12,100 crore, or 95 per cent of total sales.

In the full year (FY14), the bad loans sold stood at ₹16,960 crore as against ₹1,320 crore a year ago.

Earlier this month, the RBI tightened norms by increasing the mandatory minimum holding by ARCs in securities receipts issued by them to 15 per cent from 5 per cent.

‘Careful valuation’

P Srinivas, Executive Director, Bank of Baroda, said: “After the new rules, ARCs will opt for careful valuation of assets in such a way that they need to pay less to the banks, while banks may not be comfortable with the value offered by ARCs. So, the quantum of sales may come down.”

Further, banks are also relying on their own recoveries. BoB sold about ₹600 crore of bad loans in Q4 FY14, but no sale happened in April-June of this fiscal as the bank recovered and upgraded loans worth ₹1,200 crore.

Rajeev Rishi, Chairman and Managing Director, Central Bank of India, had this to say. “Our bank sold about ₹1,500 crore (in FY14). This year we are still to take a final view, but should be about the same or lesser than that. We will also rely on our own recoveries.”

According to VR Iyer, Chairperson and MD, Bank of India, due to lower risk appetite, ARCs may not come forward to bid for assets in a big way in the near term.

In its annual report, the RBI said the increase in restructured standard advances since 2012-13 reflects potential hidden stress in the quality of loan assets.

Further, the improvement in NPAs during Q4 of 2013-14 needs to be cautiously examined in the face of the increased offload of loans to ARCs, the RBI said.

Published on August 26, 2014

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

COMMENTS
This article is closed for comments.
Please Email the Editor

You May Also Like

Recommended for you