Under greater scrutiny, banks’ stressed asset sales to ARCs rise sharply

 George Mathew | Mumbai | August 25, 2014 8:53 am

With the CDR (corporate debt restructuring) route now coming under tighter regulatory monitoring, banks seemed to have found a new window to evergreen their stressed assets — asset reconstruction sector.

The Reserve Bank of India (RBI) has said that banks sold stressed assets worth Rs 16,960 crore in 2013-14 as against just Rs 1,320 crore in the previous year.

In the first quarter of 2014-15, banks have sold over Rs 15,000 crore to ARCs, almost equivalent to the full year’s figure last year. The full year of 2014-15 may witness asset sales of Rs 50,000 crore, say investment banks like Credit Suisse.

The RBI is not happy with the new trend. “The improvement in NPAs during Q4 of 2013-14 needs to be cautiously examined in the face of the increased offload of loans to asset restructuring companies (ARCs) by banks,” the RBI said in its Annual Report.

Out of Rs 16,960 crore asset sales in  2013-14, Rs 15,470 crore was accounted by public sector banks. Mega asset sales involving Bharati Shipyard (Rs 8,000 crore) and Hotel Leela (Rs 4,000 crore) were reported in the first quarter of this year.

Why are banks suddenly attracted to offloading of loans to ARCs? According to the RBI’s Financial Stability Report, as most of the securitisation activity is taking place predominantly with the issuance of securities receipts (SRs) rather than cash, there is concern that banks may tend to use this option to evergreen their balance sheets. SRs may not carry the stigma of non-performing assets (their value mainly being derived from the collateral and not based on the record of recovery), although the risk of loss of income on the asset still remains, in effect, with the originator, i.e., the bank.

Earlier this month, tightening the norms, the Reserve Bank increased the mandatory minimum holding in securities receipts from 5 per cent of the securities receipts issued by them to 15 per cent of the securities receipts of each class in each scheme, while granting them more time for due diligence.

This means banks will get 15 per cent as cash which can be added to the P&L account and the balance will be given by the ARC over a period of eight years depending on the recovery.

Massive corporate debt restructuring and asset sales to ARCs have aided banks to reduce the NPA level marginally. Gross NPAs increased from 2.4 per cent of gross advances in March 2011 to 4.4 per cent in December 2013, before declining somewhat to 4.1 per cent in March 2014.

The RBI said the ‘real’ incremental value addition of ARCs in the process of ‘reconstruction’ of assets, over banks’ traditional skills and informational advantage (stemming from their credit appraisal, monitoring and recovery processes) needs to be assessed. Further, as the banking industry has a significant stake in the ownership of most of the ARCs presently functioning in India, the spread of risks may not be taking place effectively, it said.