RBI asks banks not to sell NPAs cheap
The directive comes following a discovery by the central bank that some banks have sold bad loans cheap compared to the appreciated value of the securities held against these loans.
By TNN |
MUMBAI: The Reserve Bank of India (RBI) has asked banks not to dispose of their bad loans at rates lower than their net present value. The directive comes following a discovery by the central bank that some banks have sold bad loans cheap compared to the appreciated value of the securities held against these loans.
In a circular issued this week, RBI has said, “It has come to notice that in some cases NPAs have been sold for much less than the value of available securities and no justification has been given.”
The central bank said while selling their bad loans or NPAs, banks should work out the net present value of future cash flows arising from the security being sold. The sale price should not be lower than the net present value.
This principle of using the net present value as the benchmark has to be used for compromise settlements as well, the RBI circular said. If the compromise settlement is in instalments, the net present value of the settlement should be taken into account.
Bankers say with the economic recovery, defaulters are coming around for compromises and one-time settlements with banks to preserve their assets. Also, banks have been choosing settlements as this route is easier and quicker than recovering their loans through sale of assets.
The passage of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act in 2002, led to the creation of a market for bad loans. Specialised buyers such as asset reconstruction companies (ARCs) have come forward to buy bad loans from banks. There are already five such ARCs operating in the market. And many more, including some foreign players, have shown interest in setting up ARCs.
To get the best price for their bad loans, bankers have been holding auctions of NPAs to prospective buyers. However, bankers say although several auctions have been held, not many sales have taken place because prices offered by ARCs on their distressed assets tend to be lower than the rate, at which banks can recover their money on their own efforts.
In a circular issued this week, RBI has said, “It has come to notice that in some cases NPAs have been sold for much less than the value of available securities and no justification has been given.”
The central bank said while selling their bad loans or NPAs, banks should work out the net present value of future cash flows arising from the security being sold. The sale price should not be lower than the net present value.
This principle of using the net present value as the benchmark has to be used for compromise settlements as well, the RBI circular said. If the compromise settlement is in instalments, the net present value of the settlement should be taken into account.
Bankers say with the economic recovery, defaulters are coming around for compromises and one-time settlements with banks to preserve their assets. Also, banks have been choosing settlements as this route is easier and quicker than recovering their loans through sale of assets.
The passage of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act in 2002, led to the creation of a market for bad loans. Specialised buyers such as asset reconstruction companies (ARCs) have come forward to buy bad loans from banks. There are already five such ARCs operating in the market. And many more, including some foreign players, have shown interest in setting up ARCs.
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To get the best price for their bad loans, bankers have been holding auctions of NPAs to prospective buyers. However, bankers say although several auctions have been held, not many sales have taken place because prices offered by ARCs on their distressed assets tend to be lower than the rate, at which banks can recover their money on their own efforts.
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