Moneycontrol
Last Updated : Jun 12, 2013 06:16 PM IST | Source: Moneycontrol.com

RBI plans to revive stressed loan market for banks, ARCs

The Reserve Bank of India (RBI) is planning to add momentum to the lacklustre stress loan sales market wherein banks dispose off their non-performing loans to the asset reconstruction companies (ARCs).

 
 
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Saikat Das
moneycontrol.com


The Reserve Bank of India (RBI) is planning to add momentum to the lacklustre stress loan sales market wherein banks dispose off their non-performing loans to the asset reconstruction companies (ARCs). 


Recently, Usha Thorat (former RBI dy governor), the director of the Centre for Advanced Financial Research and Learning (Cafral), a non-profit organization funded by RBI, has held a meeting with banks, ARCs and rating agencies in this regard, two people familiar with the development told moneycontrol.com on conditions of anonymity.


"Based on the meeting, Cafral is supposed to submit a report to the RBI as to why business is not happening here. Citing pricing issues, banks are mostly averse of selling stress assets to ARCs, which are also struggling to get business. Agencies had articulated their mode of rating security receipts (SRs)," said a person with the direct knowledge of the development.


It is learnt, ICICI Bank, State Bank of India (SBI), IDBI Bank were present in the meeting. ASREC (India), the apex body for ARCs participated with two representatives from International Asset Reconstruction Company (IARC) and Arcil. A group of four rating agencies including Crisil, India Ratings, ICRA and Care Ratings had briefed about their process of rating SRs.


ARCs acquire stressed assets from banks at a mutually agreed upon price and then recover it from the loan borrowers and thereby earn commissions from such recoveries. Such transactions can take pace in two ways: either by cash or SRs issued by ARCs.


SR is a kind of security to be subscribed by select qualified institutional buyers including banks. As and when an ARC recovers loans, it repays back to those SR holders. In case of more than expected recovery, the latter gets incentives and vice-a-verse. SRs get ratings from agencies. Higher the ratings, better is the quality.


In the recent spate of transactions, banks which had subscribed to SRs suffered losses. ARCs were not able recover adequately from defaulting companies. Hence, banks are now averse subscribing to SRs.


According to global rating agency Fitch, the gross non-performing asset (NPA) ratio for banks are set to inch up to 4.4 per cent this fiscal year from the likely reading of 4.2 per cent in 2012-13. In 2012, the gross NPA ratio for all scheduled commercial banks stood at 3.1 percent at Rs 1,42,300 crore as against 2.39 percent at Rs 84,700 crore in 2010.


Banks initially hold on those NPAs in their books. However, lenders tend to sell those stress assets at a later stage due to higher provisioning requirements. For example, the first stage of NPA is the sub-standard category. This slips into doubtful category after one year fetching higher rate of provisions to the tune of 25-30 percent.

saikat.das@network18online.com

First Published on Jun 12, 2013 08:52 am
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