Banks sell Rs 22,000 crore stressed assets in FY14

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Rush seen in Feb, March to clean up books

Banks and companies sold stressed assets worth Rs 22,000 crore — a record — in the financial year 2013-14, as bad loans mounted in the system in a slowing economy. Of this, assets worth Rs 10,000 crore were sold in February and March.

Industry officials said a record Rs 50,000 crore worth of bad loans were pitched to the asset reconstruction companies during the year, as companies found it hard to turn them around.

Nikhil Shah, senior director of Alvarez and Marsal, a global turnaround management and transaction advisory firm, said there was a strong opportunity for the sale of stressed assets in 2014-15.

“Our estimates show total stressed assets are expected to be around 13-13.5 per cent of the total advances made during the year. As of September 2013, stressed assets stood at 10.2 per cent of the total advances worth Rs 6.3 lakh crore,” Shah said.

Public sector banks have become a lot more proactive in cleaning up their balance sheets after the Reserve Bank of India (RBI) notified new guidelines in line with those in the US and Europe on the restructuring of non-performing assets (NPAs) and their sale to asset reconstruction companies (ARCs).

“This also allows specialists to work on the NPAs,” Shah said.

ARCs are RBI-licensed specialists in loan recovery, and buy bad loans from banks at a discount and recover them from borrowers.

Some 14 ARCs, including Arcil, Edelweiss and JM Financial, have bought stressed assets this year. Arcil is India’s largest asset reconstruction company with State Bank of India (SBI), ICICI Bank and IDBI Bank as sponsor banks.

“There are special situation investors like Apollo, Clearwater and TPG, who have been investing in these assets,” said Shah.

R Rudran, chief executive officer and managing director of Arcil, said a record number of loans worth around Rs 50,000 crore were showcased to them this past year. “Loans to SMEs and medium SMEs comprised most of the loans that were on sale. A considerable amount of this got sold.”

SBI deputy managing director Soundara Kumar said, “The bank showcased about Rs 3,500 crore worth of bad assets and sold as much. It was a mix of retail and SME loans.”

Among others, Bank of India, Bank of Baroda, Uco Bank and Allahabad Bank also sold bad assets. Girish Vanvari, head of tax and transactions advisory at KPMG, said, “Banks and companies will look at both the options — unlocking value through sale and improving assets by removing policy bottlenecks.”

In FY13, lenders had showcased bad loans worth only Rs 9,000 crore, of which just 10 per cent were sold to ARCs. ARCs now face the challenge of turning these loans into operationally effective assets in a hurry.

“Banks only get little cash and rest in securities, hence the sale alone is not the panacea for all ills. Policy hurdles will have to be removed, which will be after the elections,” said Avinash Gupta, leader of financial advisory at Deloitte.

The implications of not being able to identify stressed assets and sell them in time can lead to a loss of income for banks, as they need to make larger provisions against such losses by blocking tier-I capital. “Banks then have to raise fresh equity to unblock the capital, provided mostly by the government and LIC. If the banks are not adequately capitalised and cannot advance loans to good companies, it will hurt economic activity,” said Shah of Alvarez & Marsal.

In March, RBI permitted ARCs to buy NPAs even from their sponsor banks. RBI also allowed ARCs to use part of the funds from qualified institutional players to restructure firms. ARCs were always allowed to buy stressed assets, but the deals took place on a bilateral basis . As part of the loan restructuring process, firms are given more time to pay back money.


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