At a time when banks are still dealing with elevated slippages, an older tranche of bad loans sitting in their investment books for the last eight years has returned to haunt them. Banks are preparing to set aside nearly Rs 4,000 crore as provisions as they expect a majority of the security receipts (SRs) from bad loan sales in 2011 and 2012 to go unredeemed, according to people aware of the development. The provisioning amount could be spread over two to three years as and when the dates of redemption for each set of SRs come up, bankers told FE.
Historically, when asset reconstruction companies (ARCs) bought an asset from a bank or financial institution, they typically paid 15% in cash and the remaining payable would be converted into an SR. The SRs would be redeemable after eight years and would sit in the treasury books of the seller bank in the meantime. The poor turnaround rates in assets acquired by ARCs has led to banks opting for all-cash deals in the last two years, even at the cost of large haircuts.
Not many of the assets which were sold to ARCs in their early days have been turned around.
Industry players say that only one or two of the assets underlying those SRs have yielded returns and that too through real-estate deals. “We are now asking the treasury departments to pull out those old SRs and figure out the provisions that will have to be made. All this while, they have been sitting dormant in the treasury book, but there will be a balance-sheet impact now,” a banker with a large public-sector bank (PSB) said.
Industry experts say that there will be a serious impact on the system as the dates for redemption of the SRs come up. Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services (APAS), explained that provisions would have to be made in keeping with regulations. “What happened was that the risk was moved from the balance sheet, but it was bound to come back. It’s a balance-sheet correction and it went on for eight years. Now it’s going to create some kind of pressure or challenge for the system,” he said. There is little room for the government or the regulator to act because they can neither tell the banks to take haircuts nor can they make the ARCs perform, Parekh added.
Bankers agree that the recourse to ARCs was a flawed approach in itself. “It only served to postpone the problem and we are again left holding the baby now,” said a senior executive with a PSB.
Parekh said that the right approach would be to create a market for stressed assets and NPAs rather than getting the ARCs to offer the SRs to the banks themselves. “The reform (of getting ARCs to buy assets against SRs) is incomplete because we did not create a market for people who would sit on these risks. Right now, the banks are sitting on those risks in the form of SRs,” he said.
