Transferring bad debt to ARC at book value just window dressing: Experts

Asset valuation should be left to market forces to help attract investors and create a healthy distressed debt market, say experts.

A House panel recommendation to transfer banks’ bad loans to the proposed Asset Reconstruction Company (ARC) at book value will just lead to window dressing and not help in price discovery of the underlying asset, according to experts.
 
Instead of regulated pricing, ARC officials say, the non-performing asset (NPA) valuation should be left to market forces.
 
Banks will transfer their NPAs to the National ARC, or bad bank, as soon it gets a licence from the Reserve Bank of India. Lenders are planning to transfer NPAs worth Rs 2 trillion and hold up to 10 per cent stake each in the ARC. The bad debts are expected to be transferred by September this year.
 
The parliamentary panel recommended transferring NPAs at book value, saying the longer such assets are left on the lenders’ balance sheet, the higher the chances of value erosion. The suggestion, however, has not enthused industry players who said this will not solve the problem.
 
“Instead of regulated pricing, the NPA valuation should be left to market forces which will help attract investors and lead to growth of a distressed debt market,” Hari Hara Mishra, who was associated with drafting a key Advisory Group on ARC sector reforms.
 
The book value of an asset can also be zero but it should be left to the respective ARC to assign a value depending on what value they see in the asset, officials said.
 
Banks have already started identifying bad debt of over Rs 500 crore which has remained unresolved for the last four years.
 
The National ARC was introduced in the Budget this year to help banks manage their NPAs and focus on good assets.
 
This comes at a time when the gross NPAs of Indian banks declined to Rs 7.5 trillion in the quarter ended December 2020 (Q3FY21), compared with the previous quarter (approximately Rs 8 trillion in Q2FY21) and the year-ago period (Rs 9.4 trillion in Q3FY20).

 
According to the data collated by CARE Ratings, the gross NPAs of public sector banks (PSBs) contracted between December 2018 and December 2020.
 
Among PSBs, State Bank of India (SBI) — which accounts for the highest share at around 20 per cent of the GNPAs of PSBs in Q3FY21 — saw the highest asset quality improvement, with a decline in GNPA ratio to 4.8 per cent in December 2020 compared to 6.9 per cent in December 2019.
 
SBI was followed by Punjab National Bank accounting for a share of around 16 per cent which also posted lower GNPA ratio at 13 per cent in December 2020 against 16.3 per cent in December 2019.