4 July 2019: The asset reconstruction model to help banks recover bad loans appears to be floundering. Central bank data showed that bad loan recoveries from Asset Reconstruction Companies (ARC) are just about a tenth of what was sold to them by banks.
ARCs recovered a maximum of 9.5 per cent of the security receipts (SRs) they held at the end of FY18. This number halved from a maximum recovery of 18.7 per cent made at the end of FY17. Since inception in 2004, ARCs had made maximum recovery of about 72 per cent in FY12. Data published by the Reserve bank of India (RBI) include only recovery percentages.
“The recovery rate specifically shows a precipitous decline for assets that originated after 2014,” the RBI noted. “The general recovery of low double digits across years possibly points to the inadequacies of the resolution model based on collateral disposal.”
Only in the past three-four months, banks have put non-performing loans worth Rs 1.3 lakh crore on the block, but sales have been few and far between. Bank of India recently announced that it will put Rs 30,000 crore of bad loans on the block. While the number may seem big, the bank had put up a similar amount on sale last fiscal and the recovery levels were quite poor. In FY19, the bank had identified NPAs of Rs 17,000 crore. However, it sold Rs 4,000 crore and recovered Rs 1,774 crore from ARCs.
“Most of the assets put up by lenders are past their recovery date. These are ageing NPAs, and banks should be more pro-active in selling assets early so that ARCs are able to make a healthy recovery,” said the CEO of an ARC, who did not wish to be named. “Now, most banks are working on the total cash model of buying loans and that is a better way to clean up their books.”
RBI data support the point made by ARCs. The data showed that recovery as a percentage of total dues kept on declining with ageing of bad loans. The recovery rate stood at over 2 per cent in the first year of issuance of SRs. The recovery was zero if ARCs continued to hold the SR for ten years.
“One of the reasons for the lower value is that the assets are not of a very good quality and when banks assign those assets to ARCs for monetising, they come with added costs since they manage such assets/properties until they get sold,” said Mona Bhide, managing partner of banking and finance specialized law firm Dave Girish & Co.
“Even when ARCs acquire such assets, the acquisitions do not come with clean titles,” said Bhide. “There may be some litigation or dispute attached to the assets and hence only a handful of buyers come forward, which is another factor against selling properties at right valuations.”
Another aspect is that the securities provided by lenders are often inflated in value. Hence, actual monetisation always yields significantly lesser than the loan amounts, Bhide added.
Categories: General News