Sharp rise in NPA sales to ARCs under lens

A sharp rise in sales of bad loans by banks to asset reconstruction companies (ARCs) has made the Reserve Bank of India put under its scanner the practices adopted by both.

The regulator suspects banks could be using the option of issuing securities receipts (SRs) to ARCs to evergreen their balance sheets. There is a spurt in the activities of ARCs, driven by banks' efforts on the latter. It calls for a closer look at the extant arrangements between ARCs and banks, RBI said in its financial stability report, issued on Thursday.

Foreign brokerage Credit Suisse, in its report on asset sales, said sales of non-performing loans to ARCs jumped to Rs 27,000 crore in 2013-14 from Rs 8,000 crore in FY13, and are likely to double further in FY15. However, these are being done primarily without the transfer of risk, as banks continue to hold over 90 per cent of the SRs.

ARCs have also raised their acquisition price to 60-plus per cent of book value, compared with 25 per cent historically. With ARCs earnings 1.5-2 per cent fee on the assets under management, they have been willing to incur the 5-10 per cent initial cash outflow on the inflated asset value, the brokerage said.

The share of public sector banks in the total amount of assets sold to ARCs reflects the acute stress on PSBs' asset quality and the need for prompt action, says RBI.

Most of the securitisation is happening through issuance of SRs, rather than cash. SRs might not carry the stigma of non-performing assets. Their value is mainly being derived from the collateral and not based on the record of recovery. The risk of loss of income on the asset still remains, in effect, with the originator, i.e the bank.

Any incremental value addition of ARCs in 'reconstruction' of assets, over banks' traditional skills and informational advantage needs to be assessed. Commercial banks have a significant stake in most of the ARCs operating in India and the spread of risks might not be taking place effectively, RBI added.