SBI to Sell NPAs to Asset Reconstruction Companies


For the first time in over two centuries of its history, the nation’s largest lender State Bank of India is going all out to stem the rot by offloading around Rs. 5,000 crore of its Rs. 67,799 crore (5.73 per cent of its assets) dud assets to ARCs before the end of March 2014.
The move comes ahead of the tighter provisioning norms kicking in from April 2014, which the Central Bank had in May 2013announced when it had more than doubled the provisioning for restructured loans to 5 from 2 per cent.
There are 14 ARCs functioning today in India, and the SBI has invited many of them to pick up their stressed loans of around Rs. 5,000 crore.
                                                Asset Reconstruction Companies (ARCs)
Asset Reconstruction Companies (ARCs) acquire non-performing assets (NPAs) from banks or financial institutions (FIs) along with the underlying securities mortgaged and/or hypothecated by the borrowers to the lenders. he secured assets could include manufacturing facilities like land, building, plant & machinery, current assets or even collaterals like personal properties. The ARCs then try and manage or resolve these NPAs acquired from banks. It can even infuse more funds in order to reconstruct the asset. If reconstruction is not possible and the borrower is unwilling to repay the loan, the ARCs even sell the secured assets.
While the basic principle of ARCs is the same everywhere — acquire bad loans to resolve them, the essential difference is in the ownership of ARCs, public or private. After the Asian Crisis, countries like Indonesia, Korea, Malaysia and Thailand have adopted government-owned and —funded ARCs. The Philippines, on the other hand, has opted for private ARCs. India, too, has adopted the private sector model of asset resolution. Here, ARCs are set up as non-governmental vehicles mostly with support from the banking sector and other investors. India has opted for multiple ARCs, which helps in better pricing of bad loans, as opposed to the single-ARC model followed in many countries. The RBI has already allowed licences to three ARCs and some banks are also planning to float ARCs.
The bank itself has a 75% of the total value of debt in an NPA or is able to buy out others and accumulate the same then it also gets recourse to the SARFAESI Act. In that sense, banks are on a par with ARCs.
That is why we now find that some banks are getting interest and acquiring bad assets, just like an ARC does. A bank's business is not to deal in bad assets or try and reconstruct them. An ARC, on the other hand, is in the business of reconstructing bad assets, and has acquired skill and experience in asset resolution. It is able to do the same job better. Selling an NPA helps a bank to clean its balance sheet, too.
Mechanism of NPA Transfer
ARCs acquire NPAs by way of 'true sale'. Once an NPA has been sold, the seller has no further interest in that assets. The ARC sets up trusts for the purpose of acquiring NPAs from banks. The valuation of the NPA and the price offered by ARCIL depends on the nature of security the lender has over the borrowers' assets, the value realisable from the security, and the time taken to realise that value. The RBI has laid down guidelines for valuation of NPAs. With banks being allowed to trade in NPAs, it is possible that in the future a market of NPAs may emerge, which would make valuation easier.
After acquiring an asset, the trust raises resources through issuing Security Receipts (SRs) to eligible investors (Qualified Institutional Buyers). The monies received from the issue of SRs are utilised towards payment of purchase consideration to the bank or FI from which the asset has been acquired.
Subsequently, the trust becomes the legal owner of the assets and the SR holders the beneficial owners. The SRs represent undivided rights, title and interest of investors in the financial assets held in the fund floated by the Trust. These are redeemed out of the realisation from financial assets held under the trust and carry no fixed return.
Resolution NPAs by AECs
ARCs are a product of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, '02 (SARFAESI Act). The Act provides full right to the lenders acting in majority (75% of the total debt by value) to enforce the security interest (terms of the loan) without judicial intervention.
Through buying out major lenders in a loan gone bad (to the extent of 75% of value), through the mechanism mentioned earlier, an ARC is able to have recourse to SARFAESI Act and, thereby, acquire legal muscle to force a settlement. Just to highlight the powers available, ARCs can even effect and change in the business and management of the borrower or sell/lease part of whole of the business to resolve the NPA.
The foreign investment ceiling in asset reconstruction companies (ARCs) has been increased in December 2012 to 74 per cent from 49 per cent, a move aimed at bringing more foreign expertise in the segment.


Sunday, 16th Mar 2014, 11:14:58 PM

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