Scope of NPA sale widened, nod for bank-to-bank deal

The Reserve Bank of India (RBI) has now allowed banks to sell their bad assets to other banks and non-banking finance companies (NBFC) and not just asset reconstruction companies (ARCs) as was the practice so far.

This will help banks like ICICI Bank and State Bank of India (SBI) acquire bad loans of other banks through the special stressed assets funds they have set up. This will help a weaker bank to shed the bad loan while stronger and bigger banks can recover them faster through their specialised funds.

The central bank has also asked banks to bring down their investment in the security receipts (SRs) issued by the asset reconstruction companies to 10% by April 2018, from the present threshold of 50% if the underlying asset was sold by the same bank.

So far, many banks were selling off bad loans to the ARCs and then investing into the security receipts issued by the ARCS on the same loans.

If in case the banks exceed this limit, they have to set aside more capital in lieu of these investments. That means provisioning requirements will go up.

To improve transparency to attract more buyers, RBI said banks must have a transparent policy to sell the assets and it should be through a process of e-auctions. According to RBI, the discount rate used by banks should be spelt out in the valuation exercise. This may be either cost of equity or the average cost of funds or opportunity cost or some other relevant rate, subject to a floor of the contracted interest rate and penalty.

RBI said in a release, "In order to attract a wide variety of buyers, the invitation for bids should preferably be publicly solicited so as to enable participation of as many prospective buyers as possible. In such cases, it would be desirable to use e-auction platforms."

That banks should have an open auction process to attract a larger set of borrowers is expected to result in better price discovery. "Banks should lay down a Board-approved policy in this regard. Banks must provide adequate time for due diligence by prospective buyers which may vary as per the size of the assets, with a floor of two weeks at least to respond to the auctions," said the central bank.

Banks, according to the circular, should have clear policies with regard to valuation of assets proposed to be sold. In particular, it must be clearly specified as to in which cases internal valuation would be accepted and where external valuation would be needed. However, in the case of exposures beyond Rs 50 crore, banks should get two external valuation reports. The cost of valuation exercise shall be borne by the bank.