Long wait for realisation makes lenders averse to security receipt transactions.
In view of long delays in realisation, spread over five to seven years, and conservative valuations, banks have been shying away from investing in security receipts (SRs) while selling bad debts to asset reconstruction companies (ARCs).
Instead, they have been insisting more on cash, even though valuations of bad assets are generally lower in case of cash deals than those involving SRs.
“Even though SRs generally constitute more than 50 per cent of the proceeds, in future we will prefer 100 per cent cash. We will prefer that SRs do not exceed more than 10 per cent of the deal. In SRs, there are a lot of valuation-related problems and uncertainties,” said a source at Syndicate Bank.
While in deals involving SRs stressed assets are valued at 30 per cent on an average, in cash deals they are valued at 20 per cent, depending on the quality of the assets.
“The model we are using has been perfected over the last five years. If banks are insisting on cash, we are making cash payments,” said Asset Reconstruction Company of India (Arcil) Managing Director and CEO S Khasnobis.
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During the last financial year, SR investment by banks in Arcil was close to Rs 1,500 crore, and this year too, a similar level of investment is expected.
“Cash deals are always better for banks. We try to retain the share of cash at 50 per cent. Cash is a big relief for banks as NPAs get wiped out in the same quarter. On the other hand, in case of SRs the waiting period is very long,” said Uco Bank Chairman and Managing Director S K Goel.
United Bank of India (UBI), which has identified about Rs 300-crore of bad assets for sale in the coming quarters, sold about Rs 200-crore of NPAs last year.
“Till January, around 70 per cent of our deals was in cash. The mode is dependent on the discounted rate of return and it differs on a case-to-case basis,” said UBI executive director T M Bhasin.
Generally, banks prefer SRs in case of consortium accounts and where accounts are backed by quality assets, which are expected to give good realisation over a longer period of time.
“The deal is generally dependent on the asset quality. In case of a consortium account, ARCs are preferred. If NPAs are backed by good assets, banks may prefer SRs,” said Allahabad Bank chairman and managing director K R Kamath.
While maintaining a cautious outlook for investment in SRs over the next two-three months, Icra managing director Naresh Thakkar said, “In the past, we have seen some downgrades of SRs. While SRs have a huge potential, the percentage of SRs against NPAs of banks is still very low. We are laying stress on the way these valuations are made.”
There are restrictions on retail participants and mutual funds for investing in SRs. Though insurance companies are free to invest in them, their participation is very low.