NPA sales down to a trickle of just 2% of total bad loans

Notwithstanding rising bad loan problems in the system, sale of stressed assets to asset reconstruction companies (ARCs) in 2015-16 was only a trickle of the NPA mount at 2 per cent of the total of nearly Rs 5.8 trillion, which is down a whopping 20 per cent from previous year, says a report.
"The overall loans sold in FY2016 were lower by 20 per cent y-o-y and around 15 per cent of the overall loans in the banking system," Kotak Institutional Equities said today in a report that is based on the analysis of 33 public and private banks.
The report did not offer any reasons for the massive dip in the sales, but it can be noted that banks are not happy with the cheap valuation that ARCs are offering while these companies are capital starved to make the higher upfront payments to the banks. The report also did not quantify the total amount of bad loans sold to ARCs.

As per RBI, total NPAS in the system jumped to 7.6 per cent in 2015-16, up from 4.6 per cent in the previous fiscal, which it warned could jump to a whopping 8.5 per cent by this fiscal end. The total stressed assets including NPAs stood at a staggering 13 per cent or over Rs 8 trillion in 2015-16.
State-run banks sold 75 per cent of their overall bad loans, lower than the 90 per cent of loans sold in 2014-15.
Axis Bank sold the largest quantity of loans but at a significant loss. The SBI Group, however, had the largest share of loans sold at 33 per cent of the overall loans compared to over 60 per cent in 2014-15.

In 2015-16, a large number of standard loans were sold

compared to 2014-15 which includes NPLs and write-offs. "This implies that values of these loans were already marked down at the time of sale," the report said.
At a consolidated level, the overall loss booked was 21 per cent of net book value of loans compared to 12 per cent in 2014-15. The net value of loans sold has resulted in a loss compared to a gain in 2013-14.
Total NPLs sold in fiscal 2016 were above the reported book value of these banks.
Public sector banks, excluding SBI and a few others, have reported a 25 per cent gain on the sale of these NPLs while private sector banks have reported a loss of 7 per cent over the book value of these loans sold.

Most ARCs are moving beyond liquidating assets and taking fees on NPLs sold and are actively looking to build talent for turning around these assets and offer consultancy services wherever required.