Non-performing assets of the Indian banking system have crossed the Rs 9 lakh crore-mark
Reports suggest that asset reconstruction companies (ARCs) purchased non-performing assets (NPA) valued at around Rs 5,000 crore in the most recent July-September quarter. Compared to the previous April-June quarter purchases of ARCs, which market experts have put in the ballpark range of around Rs 7,000 crore, the total amount of NPAs brought this year have been down by around 28 per cent, a sizable dent but not one that cannot be overcome. In the last FY, ARCs bought NPAs worth Rs 35,000 crore, surpassing their FY16 purchases by about 75 per cent. Chances are that the rather lukewarm purchases by the ARCs this year could see a rise given that banks tend to press the pedal on these sales in the second half of the financial year.
However, irrespective of the sales figures that will be thrown up by the end of the year, the government could help ease pressure on banks’ balance sheets by introducing several structural reforms that have been nothing less than a roadblock to an expedited disposal of NPAs.
But first, a little bit of context. The SARFAESI or the Securitisation and Reconsturction of Financial Assets and Enforcement of Security Interest Act, passed by Parliament in 2002, provides for the establishment for ARCs. As of this day, around 19 ARCs operate in India that can purchase secured assets from banks by paying in cash or issuing debentures, bonds or any other form of security.
Banks follow a practice of putting up the NPAs for auction, after stating their reserve prices, and then proceed to sell it to the highest bidder. ARCs do not foot the entire acquisition cost upfront and instead issue security receipts.
This dynamic changed way back in 2006 when the Reserve Bank of India mandated that ARCs will have put in a minimum of 5 per cent in each segment of SRs, essentially ensuring that ARCs have some skin in the game. In 2014, the cash requirement as part of the SRs was increased to 15 per cent dealing another body blow to the possibility of a fast recovery from the seemingly interminable NPA crisis. The FY17 union budget did throw up some relief when it said that non-institutional investors would be allowed to invest in SRs, but till date there has been no action on that front.
Meanwhile, the pile of toxic loans on the balance sheets of both public and private sector banks is mounting; some estimates suggest that it has already entered the territory of around Rs 9.5 lakh crore. In such a dire situation, the focus should have been on moving these bad loans from the books of PSBs. Instead, a fastidious government’s inaction on bringing down the cash component in SRs has meant that negotiations between banks and ARCs on the selling price are not just lengthening, but many transactions are also being killed midway.
Many ARCs, to accommodate the cash requirement, have started pricing the NPAs at lower rates leading to bank officials backing out from the deals. If the government acts fast, it could possibly bring in a revival in sale of NPAs. If it does not, it will be business as usual, albeit at a snail’s pace and at even lower volumes.
Almost all PSBs require recapitalization and the government cannot provide all the money. Sustainable solutions are needed
The ever-growing bad loans of public sector banks (PSBs) have kept them perennially in need of funds from their principal owner. The government has committed to infusing Rs70,000 crore of taxpayer money under Mission Indradhanush. Reserve Bank of India (RBI) deputy governor Viral Acharya has conceded that the programme will be grossly inadequate to address the problem—and that what is needed is something like the sudarshan chakra. The deputy chairman of the erstwhile Planning Commission, Montek Singh Ahluwalia, has suggested in this newspaper recognition, resolution, recapitalization and reform (by reducing government equity to 33%) should be the four “Rs” of the sudarshan chakra.
Non-performing assets (NPAs) are inherent in banking. The discussion these days tends to concentrate on very large NPA accounts, numbering less than 50. In the process, a large chunk of agricultural, small and medium enterprises (SMEs) and mid-corporate NPAs get ignored. As almost all PSBs require recapitalization and the government cannot provide all the money, sustainable solutions are needed.
PSBs wrote off a record Rs81,683 crore worth of bad loans in the financial year ended March 2017, a jump of 42% over the previous year’s write-off amount. Loans written off during the last five years amounted to a whopping Rs2.46 trillion, comprising mainly agricultural, SME and mid-corporate loans. Though written off and valued at zero, these loans are covered by primary security and collaterals—mostly real estate—worth several thousand crores. As per regulatory prescription, these securities are valued at zero irrespective of their realizable value, sometimes much higher than the loan outstanding. In developed markets, the resolution process is quick; in India, it can take many years, and then more for actual cash recovery.
Apart from the lengthy legal process, recovery of bad loans is hampered by several other factors. First, in the case of consortium and multiple banking arrangements, the loans and underlying securities are fragmented among several banks. This creates a major impediment as a bank with a relatively insignificant share can delay or scuttle the whole resolution process. Second, unlike in developed economies, in India there is no active secondary market for NPAs that would enable an exit from problem loans when considered appropriate. Despite being experienced in NPA resolution and important actors in the financial sector, banks themselves stay away from participating in NPA auctions. Most of the time, after several failed attempts, the selling bank has no option but to sell the loan to an asset reconstruction company (ARC), which is the only bidder. The combined capability and geographic reach of ARCs is minuscule compared to the size and geographic spread of NPAs. Third, there is a lingering fear in the minds of some bank executives of their decisions being questioned by government bodies.
Putting PSBs’ bad loans for auction “exclusively for the PSBs” can address most of these issues and create an active secondary market for NPAs. In order to attract larger participation, the auction can be carried out with no reserve price or security deposit. As sellers and buyers are owned by the government, there wouldn’t be much scope for underhand dealing. Agricultural and SME loans can be auctioned in a calibrated manner.
Different PSBs could approach the proposed auction from different perspectives. In the case of written-off or fully provided for NPAs, any amount realized would get added to capital. This would be a saving proposition for a PSB which is starved for capital. It could be for the consolidation of bad loans scattered across banks for better resolution. It could also be for creating a distinct portfolio of loans acquired at distress prices. This could make good business sense, as even a small recovery out of this portfolio, acquired at rock bottom prices, could provide an attractive return.
The suggested process is not evergreening, for the sale would be on outright cash basis through an auction. It would be in line with RBI guidelines which permit buyers of such loans to treat them as “standard assets” for three years subject to certain conditions. No external approval would be needed as the RBI has already permitted banks to carry out such trades on the basis of a policy approved by the board of the bank concerned. Looking into the inherent advantages, some banks may transform themselves organically into “bad banks”, the creation of which is considered by many experts to be the need of the hour.
As for funds for buying these assets, they are already there with the banks; loans are “technically” written off against provisions created out of actual profits generated by banks. There is no cash outflow. For example, the State Bank of India made an operating profit of Rs50,848 crore during FY 2016-17. Out of this, Rs32,247 crore was transferred towards a loan loss provision; technical loan write-offs amounted to Rs20,570 crore, with no cash outflow.
Ideally, this process could be implemented by PSBs whose capital has been badly eroded as a prompt corrective action, prior to approaching the government for recapitalization. A similar process may be carried out before the merger of PSBs, in order to bring out the hidden value of the PSB being acquired. Selling written-off or fully provided for NPAs in an exclusive auction among PSBs for raising capital may be a better proposition than selling the bank itself for a song.
M.G. Vaidyan is former deputy managing director-stressed assets management, State Bank of India.
Here are just a few of the reasons that homeowners and investors are going to the Bank Auctions / foreclosure market.
1.PRICE ADVANTAGE: Bank Auction properties are approximately 25 % cheaper than market price.
2.LEGALLY SAFE: Since Banks / Financial Institutions have given loan after verification of all the legal aspects only, Bank Auction properties are 95 % legally safe.
3.CREDIBILITY OF SELLER: You are buying from a Bank / Financial institution, which is authorized by Govt of India to sell such properties.
4.TIME FRAME: Entire transaction will be over in less than two months period. Ownership will be transferred in one month.
5.TRANSPARENCY: 100 % transparent transaction.
Buying properties in Bank Auctions is an intelligent financial decision.
The following are the seven steps to buy properties in Bank Auctions (https://bankauctions.in/) / Foreclosure properties (http://foreclosureindia.com/).
i. Read The Auction Notice Carefully,
ii. Verify Documents,
iii. Inspect property,
iv. Make Finances ready,
v. Submit tender,
vi. Participate in Auction,
vii. Get Sale certificate.
1. Read The Auction Notice / Sale Notice Carefully: Advised to take a printout of Auction notice and read the details mentioned in the advertisement carefully and note down the important aspects like contact details, inspection date, reserve price, earnest money deposit ( EMD), cost of auction forms, tender submission time & date, auction date & time and finally e-auction website details.
2. Documents Verification: Enquire with the bank / financial institution about further information of the property. Visit the Bank and see all the documents such as registration documents of the present borrower, link documents, latest encumbrance certificate pertains to the property, approved layout for plot by the competent authority, approved plan for flats / houses by competent authority etc. If required, consult with a solicitor / advocate before the auction. Once this aspect is clear, you can proceed further.
3. Inspection of the Property: Visit the site of the property as per inspection schedule given in Sale notice. Consult people around the property to know the price prevailing in that area. While inspecting the property observe the present physical condition of the property, enquire about the pending property taxes, electricity dues, welfare associations maintenance dues. The property comes as is, as such any pending dues should be added to your consideration price before quoting.
4. Get your Finances Right: Please make sure that you are prepared for the price to be paid for the property. If you have ready cash, you can clinch the deal faster and possess the property fast. If you are thinking of availing a Bank Loan, you may approach some bank for sanction of pre-approval loan to complete the transaction in the specified time frame very smoothly.
5. Submission of Tender: Submit the bid at the specified branch before the due date and time, along with demand draft / Banker cheque as EMD ( earnest money deposit ), copies of purchasers PAN card, photo identity card and residence proof. In most of the cases the EMD amount is 10% of the reserve price.
6. Participating in Auction: Based on the data & statistics of the foreclosure properties / bank auction properties in India, around 60% of the Bank auction properties are unsold, due to various reasons. Around 30% properties are getting one bid only. Around 10% properties are getting two or more bids. In case of E-Auction, please take training from the E-Auction service provider at free of cost, the details of e-auction service provider are available in E-auction notice. Any Bidder / Investor is successful, if he/ she is the highest bidder in the Auction. Bidder / Investor needs to pay 25% of the highest bid amount minus 10% EMD amount already paid, on the same day of the auction. Balance 75 % amount is to be paid with in 15 days / 30 days as specified by the Bank / Financial Institution.
7. Sale Certificate & Registration: After payment of the total amount either from own sources or through Bank loan, a sale confirmation certificate will be issued. Investor have to pay the stamp duty and get the property registered on their name. The Authorized officer will register the property on behalf of the Bank. After completion of registration, the physical possession of the property will be handed over to the Investor.
All the real estate Investors / NRI investors are invited to utilize this opportunity to buy good properties at much discounted rate.
Bhargav, Managing Partner of Foreclosureindia.com says, “During the last 8 years we have created awareness about Bank Auctions and Transparency by disseminating the information of Bank Auctions at free of cost.
From November 2017 onwards, we are introducing premium service for the investors with better information duly giving more information with better search facility. All NRI investors are requested to write to us at firstname.lastname@example.org, for any assistance required for buying Bank Auction properties in India.