Bonjour, new guests from small-town India
Puneet Dhawan of Accor is brimming with ideas on ways to revive the hospitality sector
With the pandemic crisis expected to increase delinquencies in the months ahead, many banks have set aside sizeable provisions to tide over the stress. But aside from providing for bad loans, banks may also have to set aside additional provisions for their investments in security receipts (SRs), held against bad loans sold to ARCs (asset reconstruction companies).
Data compiled from the FY20 annual reports of banks suggest that many banks currently carry provisions at about 20 per cent of the book value of SRs held by them. While this is in line with the existing regulatory requirements, according to bankers, many lenders may look to increase these provisionsto provide additional cushion amid the Covid-led crisis. This is because there are now growing concerns over the expected fall in the valuation of distressed assets.
According to SBI’s annual report, the book value of SRs held by it stood at ₹8,761 crore, against which the bank has made provisions to the tune of ₹1,656 croreor about 19 per cent. Much of these pertain to the sale of bad loans made between 2014 and 2016. Of the total book value of SRs, about ₹6,000 crore are SRs issued more than 5 years ago (but within 8 years) as disclosed in the annual report.
According to J Swaminathan, DMD-Finance, SBI: “Of this ₹6,000 crore, about 90 per cent will mature between 2024 and 2026, hence, impact if any, of the current pandemic on this portfolio, may not be much. But as a prudent measure we are looking to make additional provisions (over and above regulatory requirement) on these SRs.”
Typically, asset reconstruction companies (ARCs) buy banks’ bad loans by paying a portion as cash upfront (15 per cent as mandated by the RBI), and issue security receipts (SRs) for the balance (85 per cent). At the time of recovery, banks get their share of the proceeds (85 per cent) after ARCs deduct their management fees.
Until then, banks record the SR portion as investments in their books and make provisions based on the SR’s net asset value (NAV) arrived at by the ARCs. The NAV is, in turn, determined by the ratings assigned to the SRs by rating agencies, based on the underlying realisable value of the assets and the expected cash flows.
The level of provisioning on SRs (see table) varies across banks – from 19 to 69 per cent. For instance, Bank of India holds about ₹1,593 crore of provisions against ₹2,300 crore of SRs (book value), while PNB holds just ₹144 crore provisions against SRs (book value) amounting to ₹1,400 crore. Axis Bank and ICICI Bank hold about 19 per cent provisions against their SRs.
According to a spokesperson at Axis Bank, “the provisions held on SRs represent the provision for depreciation determined based on the difference between the book value of SRs and latest NAV of SRs that is provided by the ARC”.
Weak track record of recovery rate (30 to 40 per cent) in the past, coupled with expectations of sharp downgrades by rating agencies owing to fall in the value of underlying assets amid the pandemic crisis, may require banks to beef up existing provisions on SRs.
Currently there are 28 ARCs with the total value (cumulative) of SRs issued amounting to over ₹1-lakh crore.
Puneet Dhawan of Accor is brimming with ideas on ways to revive the hospitality sector
Citroen’s first vehicle sports a novel design and European interiors. It is also meant to be as comfortable as ...
The pandemic is only the tip of the iceberg that the country’s cash-poor airlines — both regional and national ...
The government is yet to specify the framework of its recently announced old vehicle scrappage policy
Here is a checklist that equips you to discern the market nuances
Sensex, Nifty 50 have witnessed sharp decline
The fund has consistently outperformed S&P BSE 100 TRI over one, three and five years
Returns are superior to immediate annuity plans, but SCSS can secure better rates for new investors sooner if ...
With the public looking beyond mainstream media for reports from the ground, independent digital platforms are ...
While Supreme Court has cleared the way for women seeking longer tenures and senior roles in the Indian Army, ...
Mughal Gardens in the Capital open to visitors — albeit with Covid-19 protocol — for the annual Udyanotsav
Salty, buttery, cheese coated or with maple syrup and bacon — popcorn is lending its adaptable self to gourmet ...
Its name is the starting point of a brand’s journey and can make a big difference in the success sweepstakes
Sober spirits are the in thing
A peek into where ad spends went last year and where they are headed tomorrow
Can Swiggy Instamart disrupt the ecommerce groceries space, currently ruled by the Amazons and Big Baskets? ...
Three years after its inception, compliance with GST procedures remains a headache for exporters, job workers ...
Corporate social responsibility (CSR) initiatives of companies are altering the prospects for wooden toys of ...
Aequs Aerospace to create space for large-scale manufacture of toys at Koppal
And it has every reason to smile. Covid-19 has triggered a consumer shift towards branded products as ...
Please Email the Editor