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RBI Seeks To Revamp Sale Of Stressed Assets By Lenders

RBI seeks to widen the secondary market for stressed loans.

A sign for the Reserve Bank of India is displayed inside central bank’s headquarters in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)
A sign for the Reserve Bank of India is displayed inside central bank’s headquarters in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

The Reserve Bank of India has proposed a new set of rules governing sales of stressed assets, which give lenders greater flexibility in the pricing of these loans and deciding who they are sold to.

The draft guidelines say that any lender seeking to sell stressed assets will need to do so under a board-approved policy. Lenders can consider all assets classified as “doubtful assets” for the purposes of sale.

The RBI’s draft also suggests that the buyer of the stressed asset need not be a financial entity. However, the seller would need to conduct a thorough due diligence of the buyer to ensure that they are not barred under Section 29A of the Insolvency & Bankruptcy Code and have no connections with promoters of the companies which originally borrowed the loan.

The RBI has proposed that the sale process should be conducted through a public call for bids and the potential buyers must be given adequate time to conduct due diligence of the asset, with a floor of two weeks minimum.

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Rules For Sale To Bidders Other Than ARCs

  • Sale must be conducted on a full-cash basis.
  • Funds must be fully received upfront before transfer of assets.
  • Buyers must hold the assets for at least 12 months before selling it down further.
  • Buyer must assign 100% risk weight to NPAs during purchase.
  • Purchase of non-performing investments must include capital charge for market risks.

If the buyer has no existing exposure to the borrower whose stressed loan account is acquired, the purchased stressed asset shall be classified as “Standard”. Thereafter, normal classification standards will be followed, depending on the record of recovery.

Rules For Sale To ARCs

  • Lenders can accept cash, bonds, debentures, security receipts, pass-through certificates from ARCs.
  • Securities can be issued for a maximum period of six years, carrying an interest rate which is not lower than 1.5% of the applicable bank rate during sale of asset.
  • ARCs will be required to fully redeem the securities, if they sell the underlying asset before the securities expire.
  • SRs or PTCs which are not redeemed at the end of the resolution period shall be treated as a loss asset in books of the lenders and fully provided for.
  • In cases of specific stressed assets, where it is considered necessary, lenders shall be free to enter into agreement with the ARC to share any surplus realised.

A lender will be allowed to write back excess provisions only when the recovered amount is higher than the net book value of the asset. The provision written back will be to the extent of the amount recovered, which is in excess of the net book value. As of now, lenders write back provisions representing the full amount recovered from an asset.

ARCs are also allowed to participate in purchase of assets where no recoveries can be made. In such cases, the ARC will act as an agent to the lender and work on a fee to sell the securities available against the loan account. In such cases, the assets will not be removed from the books of the lenders but realisations, as and when received, shall be credited to the asset account. Lenders shall continue making provisions for the asset in the normal course.

Price Discovery For Sale Of Stressed Assets

  • Sales to be conducted through public auctions.
  • ARC which owns the largest amount of loans to a borrower, or financial institution with largest exposure, can match the highest bidder.
  • Lenders free to sell to a bidder who is not the highest bidder, if they adequately provide for the asset.

Current norms do not require lenders to conduct a public auction for selling a stressed account as bilateral deals are allowed. Only when insolvency is invoked against an account, are lenders required to conduct an auction. The current norms also do not specify the need for allowing ARCs to match the highest bidder.

As per the latest draft guidelines, lenders are also expected to make adequate disclosures regarding sale of assets in their financial statements. They will also be expected to reveal the amount of security receipts held in their investment book and the provisions held against them.

The banking regulator has also suggested that the seller fully distance itself from the asset during the sale. The seller of an asset shall not provide any credit facilities to it, after such a sale is completed. The seller shall also provide adequate time for due diligence to a buyer, with a minimum two-week limit. All legal rights with respect to the asset being sold should be transferred to the buyer, the regulator said.

The RBI has sought responses on these draft recommendations by June 30.