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ARCs lap up half of bank bad loans on sale

Friday, 1 August 2014 - 7:15am IST | Place: Mumbai | Agency: dna

Asset reconstruction firms buy 15,000 crore of bank bad loans in June quarter; After Bharati Ship and Hotel Leela, Electrotherm with a loan of Rs 3,200 cr is up for sale

Banks have put up about Rs 30,000 crore worth of bad loans to be sold off to asset reconstruction companies (ARCs) during April-June quarter.

Of these, ARCs have already bought about Rs 15,000 crore worth of loans. These include retail loans, mid-corporate and large corporate accounts. Even loan accounts that are referred for corporate debt restructuring (CDR) are now being showcased to ARCs for sale.

Electrotherm (India) Ltd, an Ahmedabad-based engineering company, which was a CDR account with a loan outstanding of Rs 3,200 crore, is now up for sale to the ARCs.

Banks like State Bank of India (SBI) have been selling off accounts that are due for 60 days and it is being directly undertaken by the mid-corporate group without being routed to the stressed assets management group (SAMG).

The other large corporate accounts that got sold off to the ARCs in the recent past were Hotel Leelaventure and Bharati Shipyard. ARCs buy the assets at 10-20% discount and make profit by selling them.

Indian Overseas Bank sold off Rs 1,368 crore worth of bad loans to ARCs, received a 5% cash back on these assets, which can be written back to profits under new RBI guidelines.

Other banks like Bank of India sold off during April-June Rs 1,700 crore of four or five accounts, which include Rs 80 crore of prudential write-offs, Rs 890 crore of technical write-offs and some from the standard accounts (SMA II).

P Rudran, chief executive officer and managing director of Asset Reconstruction Co of India Ltd (Arcil), said, "Banks have showcased Rs 30,000 crore worth of bad loans of small and medium enterprises, retail and mid-corporate accounts."

Punjab National Bank, State Bank of India, Oriental Bank of Commerce, Indian Overseas Bank, Bank of Baroda and Bank of India are some of the lenders that have put their bad loans on sale.

A fresh set of guidelines put out by RBI has allowed banks to sell their bad loans to ARCs and write back the proceeds to their P&L accounts.

Under the guidelines, when an asset of Rs 100 crore is sold off to an ARC, about 5% of this is given back to the bank as cash back which can be directly written back to the P&L account.

The remaining consideration is issued as security receipts to the banks in lieu of payments that ARCs will make over a period of eight years based on their recovery.

In order to prevent a pile-up of NPAs, the regulator has asked banks to segregate accounts on the date of repayment from the time they are 30 days due, 60 days due and 90 days. Banks such as SBI and BoI have started selling off accounts from the time they are due for 60 days.

According to the RBI data, the gross non-performing assets of commercial banks were 4% of total advances in March 2014, while in the year-ago period it was 3.4%. According to ratings agency Icra, NPAs were highest for public sector banks at Rs 227,300 crore in March, 2014, as against Rs 164,500 crore a year ago.

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