Bad loans: Lenders sold Rs 35,000 cr NPAs to asset reconstruction companies in FY17

By: |
Mumbai | Published: April 6, 2017 4:08:31 AM

Lenders managed to sell `35,000 crore of non-performing assets (NPAs) to asset reconstruction companies (ARCs) in FY17, sources said, adding that banks had put on sale close to `70,000-crore debt.

At present, loans are sold on a 15:85 basis, where 15% of the asset value is paid upfront and the rest is paid through security receipts (SRs).

Lenders managed to sell `35,000 crore of non-performing assets (NPAs) to asset reconstruction companies (ARCs) in FY17, sources said, adding that banks had put on sale close to `70,000-crore debt.

“On an average, assets were sold at a 50% discount, and therefore, the aggregate selling price of those assets was `17,000 crore,” a source said, adding that Edelweiss ARC bought the largest chunk of bad loans at

`21,000 crore and was closely followed by Phoenix ARC and JM Financial ARC. “Asset Reconstruction Company India Ltd (ARCIL), which used to be a big buyer of bad debt, has not been bidding for many assets recently,” a source said.

At present, loans are sold on a 15:85 basis, where 15% of the asset value is paid upfront and the rest is paid through security receipts (SRs). SRs held by banks are redeemed as and when the ARC recovers the loan.

Also Watch:

That apart, ARCs also charge a 1.5-2% management fee every year as part of the recovery process.

Beginning April 1, the RBI has mandated banks to set aside more money if they hold more than 50% as SRs in loans they have sold to ARCs. According to the chief of a large ARC, while the rule will push banks to sell more loans and also price them better, lenders expect the RBI to tweak the guidelines soon.

While lenders put up `1.3 lakh crore of loans on sale in FY16, only `20,000 crore loans were bought by ARCs, and on an average, success rates have started to come down to 18-20% from 40-45% earlier.

According to Capitaline data, total bad loans of 41 banks stood at `7 lakh crore in the December quarter of FY17, up 60% from the same period last year. In Q2FY17, gross NPAs of the same set of banks stood at

`6.74 lakh crore.

A Kotak Institutional Equities report pointed out that asset reconstruction companies were moving beyond liquidating assets and taking fees on NPAs sold and are actively looking to build talent for turning around these assets and offer consultancy services wherever required.

The valuation tussle between lenders and ARCs began in August 2014, when the

Reserve Bank mandated upfront investment of 15% in security receipts (SRs) from

5% earlier to ensure ARCs have ‘more skin in the game’.

Close to one-third of loans sold to asset reconstruction companies in FY16 originated from public sector banks (PSBs), compared to 90% in the previous year.

Around 75% of loans sold in FY16 were primarily from public sector banks, but was lower than 90% of loans sold in the fiscal prior to that.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.