The Hindu Business Line : Banks find NPA recovery more gainful than sale to ARCs

PUBLIC sector banks prefer to pursue recoveries of non-performing assets (NPAs) and retain transfer to asset reconstruction companies (ARCs) as the last option.

Bankers said that the reluctance to transfer NPAs was on account of improved recoveries last year, buoyed by the amended Securitisation Act.

This year, each bank is expecting to recover at least Rs 500 crore.

Some bankers said that during the first quarter of the current fiscal, they had made cash recoveries of over Rs 100 crore.

The recoveries would allow them to push up bottomline and improve capital because the interest and penal recoveries are credited to the profit-loss account and treated as extraordinary income. Principal recoveries are credited to capital reserves.

One of the major factors in the way of NPA transfers to ARCs such as Asset Reconstruction Company of India Ltd is the high level of discounting to face value.

Bankers said that ARCIL's discounting rates are on the higher side. In some cases, bankers have had to part with NPAs at discounting rates of 50 per cent, which means that they would be recovering only 50 per cent of their principal.

Another factor preventing bankers from passing NPAs to ARCs is the fact that they would have to make large provisioning in the balance sheets, if the assets are liquidated at very high discounts.

Moreover, bankers said the ARCs preferred to cherry-pick the NPAs. "If the bad loans are to remain with us, it is better for us to pursue recoveries."

According to them, only those loans that are written off are being offered to ARCs so as to realise a notional value.

None of the banks is prepared to pass on substandard or doubtful assets. In both these categories, banks prefer to pursue rehabilitation measures, including rescheduling or restructuring efforts to convert them eventually to standard assets.

But with some private sector and foreign banks coming into the market for buyout of the distressed assets, pricing would eventually improve.

Kotak Bank is already in the market for distressed assets at highly competitive discounting rates.

However, bankers said what could really change the situation and shrink the discounting rates even further is the entry of specialised foreign funds. (Currently, foreign funds are not allowed to enter the sector.)

Some private sector banks are attempting to impress on the Government to relax the regulations and amend the Securitisation Act to allow foreign funds to enter the sector.

Permitting foreign funds into the sector would make the discounting more realistic and make it more attractive for bankers to pass on NPAs to ARCs, bankers said.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Dollar on a cyclical upswing?

Rupee weakens; bonds decline

Infosys tool for Philippine bank

HDFC Bank plans to set up NBFC

Max NY Life keen on more bancassurance tie-ups

RBI alters accident cover norms for Kisan credit cardholders

Stand-alone health insurance — Apollo Hospitals, US co show interest

TMB's new facility

Banks find NPA recovery more gainful than sale to ARCs

`Banking sector must protect itself from defaults'