State Bank of India has begun the process of selling bad loans amounting to Rs.1,580 crore to financial institutions. These loans are also offered to asset reconstruction companies (ARCs). SBI has currently blocked the sale of 11 NPAs (non-performing assets) through an auction. Currently, parties that are interested are conducting due diligence. The bidding process should begin later this month.
In October, SBI, the country’s top lender, put up Rs.3,554 crore of bad loans for sale in an auction. Out of the total loans put up for sale, the bank managed to sell only a portion of it. In the first half of 2017-18 FY, ARCs bought off Rs.763 crore of bad loans from SBI. Final approvals for the second sale are still in the pipeline.
SBI Chairman, Rajnish Kumar, stated that only when the bank is able to get the intended price it wants, the sale of assets happens. In the first two quarters of this fiscal year, the sale to ARCs has not been significant. With the bankruptcy and insolvency code brought about, especially with corporates, many cases are referred to the National Company Law Tribunal (NCLT). However, mid-sized and large corporates would probably be able to handle the bad loans better than ARCs.
According to experts, in cases of sales to ARCs, many banks look for cash-only deals or deals wherein a large portion comprises cash. The reason for this is that from the beginning of the financial year, a bank that makes investments in more than 50% of security receipts, which are created by selling bad loans and stressed assets, is compelled to put more money aside as provision. As of FY 2018-19, the threshold of this investment limit will come down to 10% from 50%.
Taking into consideration the low limit of capital in ARCs, most sale deals have a 15:85 ratio, wherein cash is paid upfront for 15% of the net asset value, while the remainder is taken care of by issuing security receipts.