The Finance ministry has called a meeting of asset reconstruction companies (ARCs) and select public sector banks this week to address the issues arising from non-performing assets (NPAs).
According to bankers, the meeting has been convened to improve the co-ordination between ARCs and banks in the bad loan management, especially the sale of NPAs. ARCs and banks have been in a tug-of-war on the issue of valuation. Asset Reconstruction Company (India) (Arcil), the first ARC in the country, witnessed a 50 per cent fall in purchases of NPAs in 2014-15 as it differed with banks on valuing the assets put on the block by banks.
The RBI has estimated that the gross NPAs of banks rose to Rs 3,03,380 crore as on December 2014.
Gross NPAs for public sector banks stood at 5.17 per cent of advances as of March 2015 while the stressed assets ratio (including NPAs and restructured loans) were at 13.2 per cent, which is nearly 230 bps more than that for the system.
Further, the CDR Cell of banks formed under the regulatory framework of the RBI says 655 companies with a debt of Rs 474,002 crore have approached them for loan recast, indicating that these companies are carrying stressed loans.
According to Arcil, banks had put on sale Rs 90,000 crore worth of stressed assets last fiscal but only Rs 20,000 crore of them were sold. The RBI said that banks sold stressed assets worth Rs 16,960 crore in 2013-14 as against just Rs 1,320 crore in the previous year. ARCs buy bad loans from lenders and sell them for a profit, enabling banks to show a healthy balance sheet with less NPAs.
The decline in demand for bad loans started in August 2014 after the RBI asked ARCs to pay 15 per cent cash upfront as against 5 per cent earlier.
The RBI increased the mandatory minimum holding in securities receipts (SRs) from 5 per cent of the securities receipts issued by them to 15 per cent of the securities receipts of each class in each scheme, while granting them more time for due diligence. This means banks will get 15 per cent as cash which can be added to the P&L account and the balance will be given by the ARC over a period of eight years depending on the recovery.
According to the RBI’s Financial Stability Report, as most of the securitisation activity is taking place predominantly with the issuance of SRs rather than cash, there is concern that banks may tend to use this option to evergreen their balance sheets.
SRs may not carry the stigma of non-performing assets (their value mainly being derived from the collateral and not based on the record of recovery), although the risk of loss of income on the asset still remains, in effect, with the originator, i.e., the bank.