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Advisory group recommends changes to reduce NPA

Mumbai: Banking Industry has been witnessing a record rise in bad loans. The advisory group on the workings of asset reconstruction companies (ARCs) constituted by finance ministry has suggested broad changes so as to reduce NPAs.
 
The advisory group has made 18 recommendations, including allowing ARCs to trade debt among themselves, letting non-banking financial companies sell bad loans to ARCs, increasing foreign participation and allowing bad debts to be converted into equity.
 
It has also suggested that the Reserve Bank of India (RBI) issue standard guidelines for the sale of bad loans to make such transactions transparent.
 
Kalpesh Gada, head of structured finance with credit rating agency Icra Ltd, said the asset recast business has not picked up because banks’ price expectations are always different from that of ARCs. “Many times ARCs want to buy an asset cheap, while banks look for higher prices. Most of the recovery of bad loans is done through sale of securities where both the quantum and timing of the sale is uncertain, which doesn’t help,” he said.
 
Rajesh Mokashi, deputy managing director at ratings agency CARE Ratings, said recovering a bad loan is a time-consuming process. “There are many processes involved and even after that an ARC may offer a higher discount than what a bank expects,” he said. He further added that these assets are sold at a loss with a charge to the P&L (profit and loss) and banks always try to minimize that charge.
 
A former managing director and chief executive of a large ARC said that the debt restructuring was started as a one-off case in 2002, but now it is a way of life. By restructuring loans, banks are now redefining bad loans. ARCs have become the last resort.
 
The report said that though banks invite competitive bids to dispose of bad loans, transactions are not completed many times because the bids are lower than the bank’s expectations. “At times the deal closure process is modified after the receipt of the bids and a different approach is adopted to close transactions,” it said.
 
The group has suggested that RBI should issue guidelines for a standard process, which includes a reserve price and conclusion of the deal if bids are received above that price.
 
“After an auction, the best bid received can be treated as price discovery of underlying security. Banks have to be mandatorily required to adopt it as reference value for mark to market,” the report said. As per Mr. Kalpesh Gada, transparency may not be possible in the bad asset market. “There are many uncertainties on the timing and valuations of such assets... One of the things that can be done is to make banks share more information because they know more about the assets on the block,” he said.
 
The group suggests that the ARCs should be allowed to acquire assets from each other and allowing insurance companies to treat SRs (security receipts) as a separate category of investment. It has further suggested that an increase in the foreign institutional investment cap. It has suggested that the sub-cap of 10% for participation by individual foreign institutional investors (FIIs) in SRs be removed.
 
Rajesh Mokashi, deputy managing director at ratings agency CARE Ratings, said, “The skill in recovery is itself going through an evolution, but the very fact that there are multiple ARCs out there looking for business, means it is evolving.”
 

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