Public sector banks have increased the pace of sale of non performing assets (NPAs) to asset reconstruction companies in order to trim their NPAs. State-owned banks have put up nearly Rs 10,000 crore worth of bad loan assets for sale to ARCs since July, more than double of total bad debt of Rs 4,000 crore that was sold to ARCs in April-June.
After the Reserve Bank of India amended its stressed asset resolution framework, banks no longer have the compulsion to take NPA accounts to the Insolvency and Bankruptcy Code (IBC) for resolution. They now have the flexibility to resolve bad debt.
The RBI s Prudential Framework for Resolution of Stressed Assets issued on June 7, 2019, which replaced the earlier controversial February 12, 2018, circular on resolution, allows banks sale of stressed standard assets that are in default, as part of the resolution process. It s not feasible to take every resolution case to the insolvency court as that is time consuming and slows down the recovery process. We have identified large number of assets that can be resolved by sale to ARCs, a senior banker with a state-owned bank said, asking not to be named.
Punjab National Bank this month put up for sale nearly a dozen NPA assets to recover dues of more than Rs 1,234 crore. The accounts include Visa Steel, which has dues of Rs 441.83 crore, IndBarath Energy (Utkal) Rs 414.23 crore, Aster Private Ltd Rs 113.57 crore and Om Shiv Estates Rs 100.16 crore. The lender has invited bids for sale on 100 per cent cash basis by September 20. Other banks including State Bank of India have also followed this route to prune NPAs and boost recoveries.
The lenders typically get 15 per cent upfront cash on the sale value of the assets while for the remaining 85 per cent, the ARCs issue security receipts to banks. While the RBI rules require ARCs to pay a minimum of 15 per cent upfront, most lenders are keen to get 100 per cent cash payment against sale of assets. To promote the ARC mode of resolution of stressed assets, the government has allowed foreign direct investors to pick up 100 per cent stake in ARCs.
Resolution through ARCs has been growing over the recent years. The book value of loan assets taken over by the ARCs from banks and financial institutions have risen to Rs 3.79 lakh crore in fiscal year 2018-19, up from Rs 3.23 lakh crore in 2017-18 and Rs 2.56 lakh crore in 2016-17. Banks typically offload their bad debts to around 24 ARCs currently operating in India to clean up their balance sheet.
In order to promote resolution through sale of NPAs, an RBI-constituted expert committee, in its report earlier this month, has recommended that foreign portfolio investors (FPIs) be allowed to directly buy distressed assets from banks. FPI Investors may also be allowed to directly purchase distressed loans from banks within permissible annual prudential limits defined by RBI in consultation with the Government of India, according to report of the Task Force on the Development of Secondary Market for Corporate Loans. The central bank has recently allowed banks to sell certain category of bad assets to eligible External Commercial Borrowing lenders.