Bad loan sales slump in July-Sept quarter of FY15

After witnessing a surge in bad loans purchases in the April-June quarter, the pace of activity has nose-dived in the second quarter of the financial year, with asset reconstruction companies (ARCs) turning cautious and choosy in picking up assets.

According to top executives with ARCs, the sale of non-performing assets (NPAs) might be less than Rs 1,000 crore in July-September 2014 - a far cry from the Rs 10,000 crore that ARCs acquired in the previous two quarters.

Over the past 18 months, the Reserve Bank of India (RBI) and the government have liberalised rules and regulations for ARCs to attract capital and increase flow of funds. The Centre also pushed public sector banks to trim their portfolio of stressed loans. These factors gave a boost to activity for a while.

It is hardly a supply issue, for banks have put a large number of accounts on the block. Rather, it is now a demand-side issue - the need to pick up assets by ARCs.

"It (Q2) is a wash-out quarter after heady growth in asset buying activity. Now, ARCs are not on a buying binge to stay ahead in the race," said the CEO of a large Mumbai-based ARC.

A combination of factors such as tightening of rules by the RBI and the constraints of limited capital for deals have made companies review their strategies before they decide to go for purchases.

The need to focus on what is on the plate - that is, NPAs bought earlier - has also made them temper the pace of acquisition, a public sector bank executive said.

Pushing for sweeping changes in the business of ARCs, RBI had in August tightened the norms to improve discipline, transparency in sale and purchase of bad loans and stress resolution.

For starters, ARCs will have to cough up more money upfront to buy non-performing loans from financial institutions. ARCs will have to pay upfront 15 per cent of bid value for assets, against five per cent paid before.

Those thinking of buying bad loans will get more time (at least two weeks) to carry out the due diligence before bidding for stressed assets. Till date, banks enjoyed complete discretion in deciding the time-frame for due diligence.

According to bankers and ARCs executives, a slew of modifications in directives will make ARCs think afresh on their business and capital-raising plans, and craft resolution strategies for recoveries.

Banks will have to think reasonably about fixing reserve prices.