RBI Nudges Banks To Sell Bad Loans  

The Reserve Bank of India (RBI) on Thursday announced a host of measures to ease the sale of bad loans by banks, a process essential to help clean up bank balance sheets.

As a first step, the banking regulator has allowed banks to sell bad loans to other banks, non-banking financial companies, and financial institutions. This is in addition to the sale of such loans to asset reconstruction companies. This, according to a banker, will expand the number of buyers in the market and help in better price discovery for bad loans.

“The new directions will help more buyers to come into the market. In particular, stronger banks may be able to step in to buy bad loans,” said RK Bansal, chief financial officer at IDBI Bank. “At the same time, NBFCs can play an important role in resolution of small accounts.”

Bansal explained that a bank may choose to buy a bad loan at a discount if it feels it can better manage the account and has adequate capital to provide for it.

This directive could also be used to reduce the number of participants in the Joint Lenders’ Forum convened for specific cases, where the larger banks may choose to acquire the loans disbursed by the smaller banks in a consortium in order to streamline the resolution process.

The RBI wants banks to have a board-approved policy and suggests that decisions to sell bad loans be made by the top management at banks. At least once a year, banks should identify and list assets for sale. The board must justify its decision to list an asset for sale or even its decision to hold on to a stressed asset.

Post this, the RBI wants banks to follow a transparent, preferably e-auction method, to offload the assets.

In order to ensure that pricing sought by banks is realistic, the RBI says that all cases above Rs 50 crore will be subjected to two external valuation reports. This will help bridge the gap between the price demanded by banks and the price that buyers were willing to pay. This gap has led to a fall in the amount of assets sold to asset reconstruction companies.

According to RBI data, asset reconstruction companies bought bad loans worth Rs 14,220 crore in financial year 2015-16, 37 percent lower than the previous year.

“In order to make sure that sale of stressed assets by banks actually results in ‘true sale’ of assets and to create a vibrant stressed assets market, it has been decided to progressively restrict banks’ investment in SRs (security receipts) backed by their own stressed assets,” said the RBI.

The RBI is suggesting to banks that they follow a Swiss Auction method for the sale of assets should a prospective buyer express interest. The Swiss Auction method is explained as follows:

• A prospective buyer may offer to bid for a stressed asset
  
• If the buyer offers more than the minimum sale price listed by the bank in cash, the bank shall be required to call for counter bids
  
• Once bids are received, the bank shall first invite the Securitisation Company /Reconstruction Company, which has already acquired highest significant stake to match the highest bid. The second priority is given to the original bidder followed by the highest bidder in the counter bidding process.

Following this process will help in aggregating debt under a single entity which will then be in a better position to come up with a resolution plan.

“If the bank decides not to sell the asset to winning bidder, bank will be required to make immediate provision on the account...” said the RBI. The provision required to be made will either be the discount on the book value quoted by the highest bidder or the provisioning required as per the classification of the assets, whichever of the two is higher.

Higher Provisioning Requirements on Sale to ARCs

To encourage banks to completely offload bad loans they sell to asset reconstruction companies, the RBI has introduced a new set of norms. They state that from April 1, 2017, banks that hold more than 50 percent of the security receipts that are backed by assets sold by them, will have to make additional provisions.

Security receipts are issued by asset reconstruction companies when they buy a loan from a bank. As per law, the reconstruction company must subscribe to at least 15 percent of the security receipts. The remainder either remains on the books of the bank or is sold to other investors.

From April 1, 2018, the threshold will be brought to 10 percent from 50 percent, the RBI said. This is likely to put pressure on banks and reconstruction companies to find investors or buyers for the bad loans.

Buyback of Stressed Assets

While pushing banks to sell bad loans, the RBI has also allowed lenders to buy back such loans should they start performing well. Banks, however, cannot buy back assets that they themselves sold to an asset reconstruction company.

“The extant guidelines of Reserve Bank do not prohibit banks from taking over standard accounts from SCs/RCs. Accordingly, in cases where SCs/RCs have successfully implemented a restructuring plan for the stressed assets acquired by them, banks may, at their discretion, with appropriate due diligence, take over such assets after the ‘specified period’ (as defined in terms of extant guidelines on restructuring) provided that the account performed satisfactorily during the ‘specified period’,” said the RBI while specifying that banks cannot buyback assets that they sold to ARCs.