25 March 2019: As part of its concerted efforts to make the process of bad loan recoveries better and more transparent, the Central government has directed the Public Sector Banks to submit details of stressed assets sold by them to asset reconstruction companies (ARC) between 2012 and 2018 fiscals.
“The (finance) ministry has asked all the PSBs to submit all details of their sales of stressed assets between FY2012 and FY2018 (that are valued at) Rs 50 crore and above,” a senior official from the Department of Financial Services (DFS) told this publication.
The official said the order has been issued after consultations with the Ministry of Corporate Affairs and the Reserve Bank of India.
“There are reports of gross irregularities in valuations in some cases. Several instances were cited where banks weren’t collecting interest on sale of assets. In many cases, assets were being sold at very low prices.
So, a final look at the books would help in making the process of recovery more transparent in future and to detect (if there are) any potential irregularities (currently),” the official added.
According to the DFS official, in many cases, the stressed assets were sold to ARCs at much lower valuations, despite an option available now to take such cases to resolution proceedings under the Insolvency and Bankruptcy Code (IBC).
The ARC business is designed to buy out debts marked as non-performing assets (NPAs) from banks at a discount. This helps lenders clean up their balance sheets, while specialists can salvage some value out of the debt-laden assets by either selling or turning them around.
However, while the ARCs accept that recoveries have been sharper post-IBC, challenges have increased for them, given the stricter guidelines set by various regulators. Also, recoveries made by the ARCs are also not keeping pace with the growth in the sale of NPAs to them.
For instance, the RBI has raised the net owned funds (the amount an ARC can start a business with) for new ventures to Rs 100 crore (from Rs 2 crore). All ARCs would have to meet this requirement from April 1, 2019.
“If you look at the market, top five out of 24 ARCs control almost 90 per cent of the business. If you see the latest guidelines, this means that regulators want only a few large players with the ability to raise funds,” said a senior executive from JM Financial Ltd.
Therefore, going forward, it’s going to get tougher for the asset reconstruction companies, they claim.
According to the latest RBI projection, the gross NPA asset ratio in the banking system is expected to touch 10.3 per cent by the end of 2018-19.
“The recovery has been very good this financial year. PSBs have performed well to meet the recovery target of 1.8 lakh crore.
In the coming fiscal, the target is likely to be higher,” the DFS official said.
The government has one more initiative, Project Sashakt, on the works.
Under this, an asset management company has to set up an alternative investment fund to buy bad loans and help in the resolution of bad loans.