With the sale of a large number of non-performing assets (NPA) stuck due to banks being unwilling to offer them to asset reconstruction companies (ARC) at discounted prices, the government has asked the lenders to consider having a standardised norm on reserve / floor price for these bad assets during auctions.
In August last year, to ensure that ARCs carry out better due diligence before buying an asset, the RBI said they should hold a minimum of 15% (up from the earlier 5%) of the Security Receipts issued by them against the stressed/bad assets acquired by them. This means ARCs pay a bank 15% of the price of the loan that is agreed upon with the banks. For the remaining amount, ARCs issue security receipts as compensation to the bank consequent upon sale of these assets.
Citing this increase in the amount they have to pay upfront, ARCs have been asking banks to reduce the value of the assets to a more practical and realistic level, but the lenders – already troubled by the rising NPAs – have been reluctant to take a huge hit by lowering the value of the asset. ARCs, on the other hand, have become less aggressive in bidding for these assets due to higher costs. The delay in sale of these assets are leading to their value deteriorating further.
The finance ministry, in a recent meeting with banks, asked them to work out a mechanism on the reserve/floor price of the assets that will be acceptable to them and ARCs, sources said.
Lenders could sell NPAs worth only R20,000 crore to ARCs in FY15 out of more than R90,000 crore of assets put on sale. In FY14, banks had offered assets worth R40,000 crore and ARCs bought loans amounting to R22,000 crore.
To ensure speedy resolution of sale of bad loans at better prices, the ministry also wants lenders to consider forming a consortium to sell these assets to ARCs. In the case of Hotel Leelaventure (loans worth R4,000 crore) and Bharati Shipyard (Rs 8,000 crore loans), where the lead bank was SBI, the lenders managed to form consortium and sell these loans to an ARC.
Besides, the ministry is looking into the demand of ARCs to relax the norm that a single sponsor cannot hold more than 50% of the shareholding in an ARC either by way of FDI or by routing through an FII. However, it is keen that there should be greater transparency in the shareholding pattern of ARCs.
Tackling bad loans
* Govt directive prompted by unwillingness of banks to offer NPAs to offer them to asset reconstruction companies at discounted prices
* The ministry also wants lenders to consider forming a consortium to sell bad assets to ARCs
* Finmin also looking into the demand of ARCs to relax the norm that a single sponsor cannot hold more than 50% of the shareholding in an ARC either by way of FDI or by routing through an FII
* Citing the increase in the amount they have to pay upfront, ARCs have been asking banks to reduce the value of the assets