Transferring sticky loans: Fully provided NPAs may go to proposed bad bank


Mumbai: Banks will transfer sticky loans to the proposed ‘bad bank’ that have been fully provided for in their books. This will be done after lenders with at least 75% exposure agree on a deal — the norm that will distinguish the new institution from existing asset reconstruction companies (ARCs) in the country.

About a dozen lenders, including some of the large state-owned entities, such as Rural Electrification Corporation and

, would be approached for equity participation in the bad bank — being positioned as a national ARC.

The broad contours of the ARC, which would focus on acquiring loans above ₹500 crore, were discussed at a recent meeting between CEOs of some of the large banks and senior finance ministry officials, two persons privy to the talks told ET.

Since ‘security receipts’ (SRs) issued by the national ARC will be partly backed by the government, the Reserve Bank of India may consider new regulations for it. Current RBI rules require banks to auction any sale of loans to ARCs towards deriving the maximum realisable value from the asset and the collaterals.

ARC-Bank Deals in Slow Lane

In a loan sale transaction, an ARC has to pay the bank at least 15% of the agreed amount in cash and the balance as SRs which are like seven-year bonds. The ARC is expected to focus on recovering the loan through negotiations and legal means to service the interest on SRs and redeem the instruments while the bank (holding SRs) pay an annual fee to the ARC. Thus, SRs are similar to ‘junk bonds’ with less than 30% receipts, according to industry estimates, having been redeemed by ARCs till now.

However, SRs even with a partial backing of the government will be comparable to quasi-sovereign securities. Understandably, an ARC issuing such government-backed SRs would be preferred by a bank while selling loans. “The guarantee, we believe, would be for a finite period, may be the first few years, and not for the full tenure of SRs. A full guarantee by the government carries a moral hazard,” said a senior banker.

Asset’s Realisable Value

Deals between banks and ARCs have slowed down in the past few years due to disagreement over the realisable value of an asset. State-owned banks are unwilling to sell loans below the amount net of provisioning.

Consider, a loan of Rs 100 crore that is categorised as non-performing asset (NPA), attracting, as per RBI’s prudential regulations, a provisioning of Rs 30 crore — the amount that has been reduced from the bank’s profit and loss account in a particular year. Here, the bank would be reluctant to sell the loan below Rs 70 crore because a sale below that price, say at Rs 50 crore, would mean an additional hit of Rs 20 crore.

So, while the bank may peg the realisable value of the loan (after exercising all legal options) at not less than Rs 70 crore, the ARC may believe that the real market value of the loan would be Rs 50 crore or even lower. Thus, bankers terrified of being pulled up later by the government agencies for selling loans below ‘realisable value’ have held on to NPAs.

Less to Fear

However, banks may be more willing to part with loans on which 100% provisioning has already been booked. Besides, there would be less inhibition and fear in selling loans to an entity like the national ARC which is partially backed by the government. NPAs that are partly provided can be sold to other existing ARCs.


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