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 Economic Times - - Companies - ANITA BHOIR

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

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