NARCL's offer prices lower than the liquidation value, say bankers

PSBs say this is the reason for slow progress of NPA sale

Offers made by the National Asset Reconstruction Co Ltd (NARCL) are lower than the liquidation value of the stressed assets in most cases, leading to slow progress in such loan acquisitions, bankers said.

NARCL was incorporated in 2021 with a majority stake held by public sector banks (PSBs) and Canara Bank being the sponsor lender.  

Over the past few weeks, Finance Minister Nirmala Sitharaman highlighted the slow progress and called for greater coordination between banks to expedite the on-boarding of stressed accounts. Last week, Canara Bank Chief General Manager P Santhosh was deputed to lead NARCL after the resignation of its Managing Director and Chief Executive Officer Natarajan Sunder. Former State Bank of India MD Diwakar Gupta is now the NARCL chairman.

Ten PSBs have transferred non-performing assets (NPAs) worth over Rs 11,617 crore to NARCL between January and November last year, according to data shared by the finance ministry in Parliament.

PSB officials said there were valuation issues on the offers made by NARCL, and they expected a better price.

“From the banks’ point of view, the offer price was lower than the liquidation. On the other hand, NARCL was of the view that there was not much value in those assets that would make it difficult for them to make the recovery,” said a senior official from a large PSB.

In some cases, a top NARCL official said, the prices could have been lower but there were other reasons why asset acquisition was slow. Many assets that were identified for sale to NARCL were not even referred to the bad bank.

“It is not in all cases [offer less than liquidation value], it may be in some cases that NARCL will review. Valuation exercise is subjective. Banks may have a different value. The question is how to strike a balance… that is a continuous process,” the official said.

“Initially, Rs 2 trillion worth of accounts were identified. Of which, Rs 76,000 crore was never referred for the NARCL process. A significant amount was then resolved by the banks themselves. So the pool itself came down below Rs 1 trillion,” the official said, adding that NARCL had now identified more accounts and had a healthy pipeline.

An email sent to NARCL did not elicit any response till the time of going to the press.

Historically, PSBs have sold the least amount of NPAs to asset reconstruction companies, Reserve Bank of India (RBI) data shows. In 2022-23, sale of NPAs to ARCs shot up to 9.7 per cent of the previous year’s stock of scheduled commercial banks’ gross NPAs as compared with only 3.2 per cent in 2021-22, mainly due to loans sold to NARCL, the RBI observed in its Trend and Progress report for 2022-23.

While private banks sold around 30 per cent of previous year’s gross NPA in 2022-23, the share of PSBs was less than 5 per cent.

“On the other hand, the acquisition cost of ARCs as a proportion to book values of assets declined to 29.8 per cent at the end of March 2023 from 33 per cent by the same month in 2022,” the RBI said in the report.

Since 2015-16, according to RBI data, PSBs sold much less NPAs to ARCs as compared to their private sector peers. In each of the last seven years, PSBs sold less than 5 per cent of the previous years’ NPA to ARC.

The reason for PSBs’ reluctance to sell NPAs is the fear of investigative agencies probing deals in case the price shot up after such a sale. Bankers cited a NPA sold by a Mumbai-based PSB to an ARC, which the ARC sold at a much higher price to a business house that caught investigative agencies attention following a complaint.

PSBs come under the ambit of investigative agencies unlike the private sector banks.

According to the RBI data, banks in the last few years have recovered the most, as a percentage of amount involved, through the bankruptcy process.