The higher level of provisions set by the Reserve Bank of India (RBI) is

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forcing banks to aggressively sell bad loans to reduce that amount that has to be set aside.

This financial year, banks are trying to auction Rs 10,000 crore in bad loans, about 35 per cent more than last year.

Majority of these loans are debt provided to small and medium enterprises (SMEs) and mortgage advances and include educational loans besides real estate and other mid-corporate advances.

Some of the lenders that are active on auctions include Central Bank of India, Dena Bank, Punjab National Bank, State Bank of India, Indian Overseas Bank, Vijaya Bank, Karnataka Bank and Federal Bank. Large private banks are not taking that route.

State Bank of India (SBI) had bad loans of Rs 23,205 crore at the end of the second quarter, with Rs 4,412 crore coming in the quarter. PNB had non-performing assets (NPAs) of Rs 4,025 crore, with Rs 2,000 crore added in the quarter.

“Large loan sales are the result of higher provisioning requirements, higher accumulation of non-performing assets and higher restructured loans that may slip into NPAs. But very few deals are happening because banks are using auctions to discover the price of assets and then settling with the borrower. Over time, banks will realise the mismatch between the expectation and ground realities,” said a senior official of Invent Assets Securitisation and Reconstruction, an asset reconstruction company (ARC).

Banks say ARCs have more cash this year and they are very aggressive. “Bad loans keep rising as credit growth expands. There are lot more auctions this year but deals are not happening because banks are expecting better prices. We will sell only when prices are right,” said a SBI official.

NPAs of banks in March 2010 were Rs 84,747 crore and the outstanding restructured book size was Rs 1,42,170 crore, RBI has said in its Trends and Progress of Banking Report.

By the end of FY11, NPAs in the banking system are expected increase by another Rs 25,000 crore, according to bankers and credit rating and research agencies.

“Banks want to sell bad loans so that they can do less of provisioning. The price they get from ARCs once the loan is sold will reflect as recovery on the books of the bank. The remaining porti­on, the discounted bit, is the loss of the bank on which the provision cover is made. All loans are sold at a discount to the book value,” said the CEO of a large ARC who did not want to be named. Any advance overdue beyond 90 days is ter­med a NPAs with higher provisions than standard account.

Till last year, any advance overdue for less than a year was termed substandard wi­th 10 per cent provisioning, and if it was overdue for a ye­ar it was classified as doubtful asset with 30 per cent provisioning, and if it was overdue for more than 12 months it was considered to be a loss asset with 100 per cent provisioning.

But last year, the RBI made it mandatory for banks to have a provisioning of 70 per cent for all loans that are overdue beyond 90 days.