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Bad loan sale by banks down to a trickle as RBI rules pinch

Lenders managed to sell around Rs 500 crore of bad loans as against Rs 15,000 crore in the previous quarter

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Stringent rules by the Reserve Bank of India (RBI) have pushed the sale of bad loans by banks to asset reconstruction companies down to a trickle. Lenders have barely managed to sell around Rs 500 crore in the second quarter (July-September) despite 20 banks showcasing Rs 25,000 crore of bad loans.

This is in stark contrast to Rs 15,000 crore worth of bad loans sold off in the auctions in the first quarter.

A few bilateral deals that private banks undertake with the ARCs are, however, out of the purview.

The sales are down after the central bank made it mandatory for ARCs to make an upfront payment of 15% of the cost of the asset so that only serious players remain in the business. Banks were unwilling to come down on the reserve price of the assets or increasing the management fee -- which is 1.5% of the cost of the loan. Earlier ARCs were aggressively bidding for 80% to 90% of the cost of the asset as they had to pay 5% cost of the asset upfront and also earn management fees of 1.5% of the cost which resulted in asset prices being sold at high prices.

A senior official of an ARC said, "Banks are not understanding the problem of the ARCs and they are toying around with high asset prices. Unless they reduce the reserve price which is bound to happen, no sales will take place. In some cases, banks are quoting a reserve price without any discounts. When sales continue to slacken, bank will become more realistic."

In the first quarter large corporate accounts like Hotel Leela Ventures and Bharati Shipyard are some of the accounts that had gone in for corporate debt restructuring (CDR) but were later auctioned off to the ARCs. Some of the high value loans that were showcased in the ARCs include Tech Pro System which had a loan of Rs 3000 crore.

A senior official from another ARC said, "The 15% cash payment upfront is like a capital investment. Earlier it was only 5% and the remaining amount was in the form of security receipts which can be encashed in 8 years time. But with higher cash payments banks need to rework on the pricing of the loan otherwise it will be difficult for the ARCs to acquire the assets. The 5% limit was like an agency fees so we are not sensitive to the pricing of the loan."

ARCs are trying to enhance their capital resources by mobilising resources from funds specialising in stressed assets.

A senior official from Arcil, the largest ARC, said, "Banks are unwilling to work on the valuations which is resulting in deals not getting concluded. When we have to pay up 15% then the valuations should be lower."

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