The sale of bad loans to asset reconstruction companies (ARCs) has slowed due to mismatch in pricing, forcing banks to turn to the insolvency court.
While assets over Rs 16,000 crore have been put on sale to clean up balance sheets as the financial year ends, ARCs that buy distressed assets, have been looking for better pricing from banks. This is slowing down the buying process, sources in the banking sector said. However, the total assets that ARCs could purchase is yet to be ascertained.
A senior banker with a public sector lender said, “We have been selective in ARC sales because they are also showing less interest as they are cherry-picking on assets. They are looking at good bargains and we don’t want to take anything beyond a certain price. After all they also want a good deal.”
Edelweiss ARC, which is one of the most active ARCs, has been focusing on aggregating debt. In the case of Binani Cement, it has aggregated 70 percent of debt and is the second largest lender (after State Bank of India) to Essar Steel.
Given that a default of over Rs 1 lakh can trigger insolvency under the IBC, banks are looking at resolutions through that route in anticipation of a better price for the assets.
On the other hand, banks are attempting to sell assets to ARCs in an entire cash deal to avoid provisioning towards the non-performing assets (NPAs) sold and also clean up their balance sheets to avoid a prompt corrective action (PCA) by Reserve Bank of India (RBI).
“Banks are in a dilemma when they sell through 15:85 as their provisions on the account continue assuming they were still in its books. And if they sell on cash, they want the same pricing which is not possible for us as out discounting rate is much steeper. Hence, there is an impasse," said Eshwar Karra, CEO, Phoenix ARC, Kotak Mahindra Group's asset reconstruction arm.
Banks sell assets to ARCs on a full-cash basis or through a 15:85 rule, where 15 percent of the value is paid in cash and the rest in the form of security receipts (SRs) which are instruments that can be sold to qualified buyers such as financial institutions, banks and alternative investment funds (AIFs) through a process of private placement. Later, high-net-worth individuals (HNIs) and portfolio managers will be allowed to trade in them.
Although SRs have been allowed to be listed, industry sources say this has not generated interest among traders.
Earlier this month, the country’s largest lender SBI, along with United Bank of India and long-term infrastructure lender IFCI had put on sale a number of NPA accounts to recover Rs 16,350 crore loans given to various companies.
Kolkata-based UCO Bank had identified about 13 NPA accounts with outstanding balance of Rs 458 crore and has invited expression of interest from ARCs, financial institutions and non-banking financial companies (NBFCs) for the proposed sale.KM Jayarao, executive vice chairman of Ambit Flowers ARC, joint venture between Ambit Holdings and US-based private investment firm JC Flowers, said his firm will raise USD 250 million (about Rs 1,600 crore) till June and look at buying assets in the mid corporate asset market. “Going forward, all ARCs will have to work together as the ability to take large assets will not be possible.”