Discounts on toxic assets up on rising Asset reconstruction companies of bad debt

Written by Vishwanath Nair | Mumbai | Updated: Jan 23 2014, 18:38pm hrs
Toxic wasteARCs are now able to buy assets at a far more attractive discount of 45-50%.
With asset quality deteriorating both non-performing assets (NPAs) and loan recasts are showing a rising trend banks are now willing to sell toxic assets at half their value, reports Vishwanath Nair in Mumbai.

Asset reconstruction companies (ARCs), which were earlier picking up such assets at average discounts of just 25-26%, are now able to buy them at a far more attractive discount of 45-50%.

In FY14, bad loans worth Rs 16,500 crore were put on the block, of which ARCs have snapped up Rs 3,500 crore worth, ARC players say. Business is expected to become exciting with another Rs 10,000 crore worth of bad loans hitting the market in the next two months. The bulk of this, not surprisingly, comprises corporate loans small and mid-level corporates with just 20% are from the retail segment. After a couple of dull years, ARCs are hoping to grow their books. Compared with Rs 12,000 crore of loans on offer last year, just Rs 2,000 crore was finally bought with banks reluctant to budge on discounts. As P Rudran, MD & CEO, Asset Reconstruction Company (India) or Arcil, says, Pricing is definitely an issue. We need to be careful since we are aware that banks have made all efforts to recover what they can, so there will be hardly anything left for us.

The way the deals are structured, ARCs pay 5-10% of the price in cash, issuing a security receipt for the rest. Banks can then redeem these receipts when ARCs start recovering. Should the ARC fail to recover enough to pay the bank what it had promised, the banks loses out. In fact, ARCs have seen low strike rates and banks havent really gained too much from such transactions.

The loans sold to ARCs are typically those where we know we cant recover much more. That is why not too many deals happen, a top official at a leading public sector bank observed. If a bank believes theres a relatively better chance for the ARC to recover the dues, it insists on being paid 15-30% of the amount upfront, accepting receipts for the rest. In cases where the underlying asset is of better quality, banks tend to offer lower discounts on the net book value and ARCs will need to consider this, says Siby Antony MD & CEO, Edelweiss ARC.

While State Bank of India is looking to put some R2,000 crore worth of assets on sale, Bank of India hopes to sell Rs 4,000 crore worth of toxic loans. Similarly, UCO Bank, Oriental Bank of Commerce, Allahabad Bank, IDBI Bank and Indian Overseas Bank too are planning to sell loans, sources said.

The Reserve Bank of India (RBI) for its part, has been trying to urge banks get more more bad loans off their books. The banking regulator intends to incentivise early sale of NPAs to ARCs, according to a discussion paper it put out in December. If banks were to make a profit on such a sale, they would be allowed to reverse the excess provisions to their profit and loss account, as against the current norm. If theres a loss, they will be allowed to amortise it over the next two years, provided they declare such losses in full.

Such relaxations will, however, be available for NPAs sold up to March 31, 2015, the discussion paper noted. Banks using ARCs as a price discovery vehicle should be more transparent disclosing the reserve price and specifying clauses for non-acceptance of bids. If a bid received is above the reserve price and also fulfils the other conditions specified, acceptance of that bid would be mandatory, the paper says. To improve liquidity and price discovery of stressed assets, the RBI will try and persuade the government to allow ARCs to trade such assets among themselves.