The smaller public-sector banks, many of which have been placed under the Reserve Bank of India’s (RBIs) prompt corrective framework (PCA), are increasingly looking to sell a larger part of their bad loans to asset reconstruction companies (ARCs), sources with direct knowledge of the development said. The move by these banks is an effort towards reducing their stressed assets and improving their capital adequacy. The gross non-performing assets (NPAs) ratio for the public sector banks was 12.6% at the end of September, 2017, data from ratings agency Icra showed, while the net NPAs stood at 7.24%. “We have seen a spurt in asset sales, particularly from the smaller banks in the last couple of months. These banks are placed under PCA and they are anxious to improve their capital adequacy,” a senior official with a large ARC said on condition of anonymity. The capital adequacy ratio for the state-run lenders stood at 12.18% at the end of the September quarter, compared with 16.21% for the private sector banks, data from Icra showed. In November last year, Kolkata-based UCO Bank offered to sell 17 non-performing accounts with an outstanding balance of Rs 1,896 crore to ARCs. In December 2017, the Chennai-based Indian Bank offered to sell non-performing accounts with a total outstanding of Rs 1,102 crore.
More recently, last Thursday, Allahabad Bank put on sale its loans to 55 different entities worth Rs 901.07 crore.“The ARCs are interested in buying the smaller assets from the banks,” the senior official of the large ARC said. “We are getting these assets at a fair value now, and it makes sense for us to buy them. We will continue to buy assets that have been referred to the NCLT and also the ones where the banks are working on resolution plans,” the official added. Most of the deals with ARCs are happening with a 15:85 cash to security receipts ratio—where 15% of the value of the assets is paid in cash and for the remaining amount security receipts are issued by the ARCs to the banks. At least half of the listed state-owned lenders have now been put under corrective action including Allahabad Bank, Bank of India (BoI), Indian Overseas Bank (IoB), United Bank of India, Corporation Bank, Oriental Bank of Commerce (OBC), Dena Bank, Central Bank, IDBI Bank and Bank of Maharashtra.
The government, through its Insolvency and Bankruptcy Code (Amendment) Bill, 2017 has barred promoters of accounts that have been classified as non-performing assets for at least a year from submitting resolution plans. However, if they make the payment for the overdue amount, they become eligible to submit resolution plans. They have been given a period of 30 days to make the payment. In the absence of the promoters, it likely to be a challenge to find potential investors for the smaller accounts that are being referred to the National Company Law Tribunal (NCLT) for insolvency proceedings, bankers said. “In such a scenario, selling assets to the ARCs is one of the options we have,” a banker with a state-run lender said. Apart from the 11 large accounts that are undergoing insolvency proceedings at the NCLT, the bankers have started referring companies from the RBI’s second list of corporate defaulters to the bankruptcy court. These include companies like Visa Steel, IVRCL and Ruchi Soya.