New Recast Rules may Spell Trouble for ARCs
One-time dispensation given by RBI to banks on sale of bad assets could burden ARCs
The new rules of restructuring may be designed to turn around the fortunes of stressed banks, but the measures appear to be sowing fresh seeds of trouble for asset reconstruction companies (ARCs), which are buying these assets. In 2013-14, sale of bad loans to ARCs jumped to .` 27,000 crore from .` 8,000 crore in the previous financial year, and the figure is likely to double further in the current fiscal, financial services company Credit Suisse said in a report. Public sector banks such as State Bank of India (SBI), Bank of India, Allahabad Bank and UCO Bank have been selling assets aggressively to ARCs. “We have sold assets worth over .` 5,000 crore to ARCs. Some of these assets have been sold at book value. ARCs have bought to boost their assets under management (AUM) and help banks reduce their non-performing assets (NPAs),” said a senior SBI official, who did not wish to be named. Some analysts say lenders want to benefit from the one-time dispensation given by the Reserve Bank of India (RBI) on sale of such loans. The RBI had in February said that if banks sold assets to ARCs below the net book value, losses incurred on this account could be amortised over two years. The offer is valid until March 2015. These transactions are being done without the transfer of the risk from the bank balance sheet. ARCs give 510% cash upfront on the inflated asset value while 90% of the value is held in security receipts. “ARCs have also raised the acquisition price to 60% of book value, compared with 25% of book historically for cash-based transactions. With ARCs earning a 1.5-2% fee on the AUM, they have been willing to incur the 5-10% initial cash outflow on the inflated asset value. The share of cash as transaction value has also come down to 8-9% vs 25% a few years ago,” said the report. To stop ARCs from inflating their shortterm profits through such transactions, RBI in April issued uniform accounting rules for ARCs. It asked all ARCs to show expenses incurred at the time of acquiring bad loans on account of due diligence immediately in the statement of profit and loss. ARCs will now have to recognise the yield only after the full redemption of the entire principal amount of security receipts. Higher income should be recognised only after full redemption of security receipts.
“Many PSU banks have sold NPAs equivalent to 5-33% of their gross NPA during the year during FY14, thus reporting a sharp reduction in reported NPAs. PSU banks, Bank of India, Allahabad Banks and UCO Bank have been the most aggressive in selling NPAs while most other banks are also planning to accelerate sale to ARCs. Instead of the resolution of stress in the system upfront, deferring the required provisions would result in further riskbuilding into the system and will continue to weigh on the valuations,” said the Credit Suisse report.
RBI in Feb said that if banks sold assets to ARCs below the net book value, losses could be amortised over 2 years