Here’s what’s boosting PSB valuations

By: |
Mumbai | Published: July 8, 2016 6:16:55 AM

Close to three-fourths of loans sold to asset reconstruction companies (ARCs) in FY16 originated from public sector banks (PSBs), compared with 90% in the previous year, Kotak Institutional Equities said in a report on Thursday.

Close to three-fourths of loans sold to asset reconstruction companies (ARCs) in FY16 originated from public sector banks (PSBs), compared with 90% in the previous year, Kotak Institutional Equities said in a report on Thursday. (PTI)Close to three-fourths of loans sold to asset reconstruction companies (ARCs) in FY16 originated from public sector banks (PSBs), compared with 90% in the previous year, Kotak Institutional Equities said in a report on Thursday. (PTI)

Close to three-fourths of loans sold to asset reconstruction companies (ARCs) in FY16 originated from public sector banks (PSBs), compared with 90% in the previous year, Kotak Institutional Equities said in a report on Thursday.

According to the report, around 75% of loans sold in FY16 were primarily from public sector banks, but were lower than 90% in FY15.

“Most banks sold some loans in FY16 as compared to FY15. State Bank of India (SBI) accounted for close to 50% of the overall loans sold. It was followed by Allahabad Bank and Central Bank,” the report said.

While lenders put up Rs 1.3 lakh crore of loans on sale, only Rs 20,000 crore were bought by ARCs, and on an average, the success rates were 18-20%, compared with 40-45% earlier. “The approach to sale has moved to single asset from the portfolio approach. Most of these assets have many lenders, making it difficult for debt aggregation, so most of these assets are repeatedly put on sale leading to lower success rates,” the Kotak report said.

The report said although most banks reported gains on sale of NPAs, they were still either at similar levels or a lower one than the current carrying value. “This is not to say that all NPAs were sold at a substantial discount, and hence depreciation required across time would be lower.”

Most ARCs, the report said, are 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. “There is a strong belief that ARCs cannot survive only on management fees. Obligation to shareholders is not to only gather management fees but also work on recovery,” the report explained.

The valuation tussle between lenders and ARCs had begun in August 2014 when the Reserve Bank of India (RBI) mandated upfront investment of 15% in security receipts from 5% to ensure ARCs have ‘more skin in the game’.

According to the report, ARCs prefer banks selling loans as a consortium rather than as individual capacity, as asset reconstruction companies are unable to add any value when they have 15% ownership of the loan. “For banks, selling loans is a balance sheet issue rather than price issue, but the recent AQR has enabled them to get a much lower price,” it added.

Banks, on the other hand, don’t have any preference for a specific ARC and like to sell only 10% of bad loans to ARC excluding written-off loans. Lenders, the report said, have problems with the valuation gap and on ARCs demanding at least 15-20% internal rate of return on loans sold.

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