Banks not excited on wider market for stressed assets

Banks want effective turnaround plan for the stressed sectors and companies which is yet to be seen

The Reserve Bank of India (RBI) has come out with yet another measure to ensure better realisation of stressed assets by widening the market for their sales. RBI has allowed banks to sell these assets to other banks, non-banking financial companies, or financial institutions. Earlier, sales of stressed assets were restricted to securitisation companies/reconstruction companies.

But banks believe this is just another step, and it may take a while before it turns out effective.

"At a time when most banks are saddled with high levels of bad loans, it is difficult to imagine they will be actively participating in the market to buy more stressed assets and then resolving them," said the chief financial officer of a private sector bank.

JUST ANOTHER STEP?

• RBI has come out with another measure to ensure better realisation of stressed assets
   
• Under the plan, it has widened the scope of those who can participate in the process
   
• RBI has allowed banks to sell these assets to banks, non-banking financial companies, or financial institutions
   
• But banks say when most have high bad loans, they won’t be participating in market to buy more

However, these new norms may bring down sale of stressed assets to asset reconstruction companies (ARCs).

"Banks will have to continue to make loan-loss provisions even if they sell stressed assets to ARCs. This is an important gap the RBI is trying to plug; it should have happened a long time ago. However, banks will not have the motivation to sell stressed assets now, as ARCs are also using Sarfaesi Act and so are the banks to recover money. And with this provision, advantage also gone, I do not see why banks would be interested in selling stressed assets to ARCs," said another banker. Sarfaesi Act is Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act.

 

The regulator has directed that from April 1, 2017, when securitisation receipts' value is more than 50 per cent of the amount of assets sold, the bank needs to make higher provisioning, which should either be net asset value declared by securitisation companies or reconstruction companies or provisioning as if it was a direct loan exposure. However, from April 1, 2018, the threshold of 50 per cent will be reduced to 10 per cent.

Abhizer Diwanji, partner and head, financial services, EY, says these guidelines will mainly help ensure the sales of assets to ARCs increasingly happen in cash. "RBI wants to make the market more liquid and with this change in provisioning requirements, banks will indulge in cash sales as there has been a change in provisioning requirements with respect to securitisation receipts."

In the past few years, RBI has come out with measures to resolve bad loans. Banks and the market agree these are steps in the right direction but it may take years for them to be effective. Experts say though the regulator is trying to come out with tools and ensure more participants in the market, one really needs an effective turnaround plan, which is yet to be seen.

"We view this move from RBI as positive as it asks bank boards to take faster action on non-performing loans to ensure the value of collateral is not impaired significantly. However, we are not too sure of the appetite for selling loans in 2018-19 if there is a gradual recovery in the economy," said Kotak Institutional Equities.