NPA sales hit as ARCs pay more upfront but offer less

MUMBAI: The Reserve Bank of India ( RBI) diktat to asset restructuring companies (ARCs) to pay more cash upfront for bad loans is beginning to bite. Asset purchasers are bidding less for distressed assets, something which has not gone down well with banks. As a result, the sale of bad loans by banks to ARCs has fallen sharply despite the general perception that the fourth quarter is the most lucrative one.

Not more than Rs 5,500 crore of bad loans are on offer in the January-March period compared with Rs 50,000 crore sold to ARCs in FY14, a large chunk of it in the last quarter. Banking executives say the bone of contention between banks and ARCs is the reserve price. ARCs say the cut-off price, below which the bank will not sell its bad loans, is too high.

In August last year, RBI tweaked norms by asking ARCs to pay more cash upfront — 15 per cent of the consideration in cash against 5 per cent earlier. The remaining amount has to be issued as security receipts payable over a period of time.

Due to the change in the payment structure, ARCs began lowering their offers for distressed assets, something banks find unacceptable. “Why should the valuation of an asset be reduced because ARCs have to pay more cash upfront? There is no linkage between the two,” said BK Batra, deputy managing director of IDBI Bank.

Only five banks have put their assets on block this quarter. Punjab National Bank, State Bank of India and Bank of India have sought bids on assets of Rs 1,500 crore each, State Bank of Patiala for Rs 700 crore and Dena Bank for Rs 300 crore.

In February, in order to encourage the sale of bad loans, RBI allowed a one-time dispensation — if banks sell assets to ARCs below net book value, losses incurred due to this could be amortised over two years. The offer is on untill March. ARCs are constrained by the new norms. “NPA sales were low only because of the price mismatch.

Capital outlay required for acquisition by ARC has gone up by three times. However, banks are unable to adjust their NPA prices despite higher upfront cash, so ARCs were very choosy in acquisition,” said Siby Antony, managing director and CEO of Edelweiss ARC. RBI made the norms more stringent after aggressive bidding by ARCs last year to accumulate distressed loans.

“ARCs paid on an average 50-55 per cent for acquisition of total dues in 2013-14 as against 27 per cent in 2012,” said P Rudran, managing director and CEO of Asset Reconstruction Company of India (Arcil). Sources said that in some instances ARCs even paid more than the outstanding loans, prompting RBI to change the payment structure.