Tag: non performing assets

Cautious banks drastically cut education loans as income, job losses rise, BFSI News, ET BFSI

Banking & Finance

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The bank credit is ticking up for industry and allied sectors in line with the economic revival, but certain segments continue to stay in doldrums.

Credit to commercial real estate and education loans shrunk by 0.5% and 8.7% on year, respectively, in October.

According to RBI data on sectoral credit deployment, loans to the industry sector increased 4.1% on year to Rs 28,54,571 crore as on October 22. On the other hand, loans to commercial real estate fell 0.5% on year to Rs 2,53,582 crore while education loans credit deployment by banks by 8.7% to Rs 47,260 crore.

Experts say banks have sharply reduced exposure to unsecured credit and are focusing on secured home loans and working capital needs of high rated corporate borrowers. While they are focusing on growing the mortgage book, banks have reduced exposure to commercial real estate, given the uncertain times.

Education loan NPAs

Nearly 9.55% of education loans extended by PSU banks were labelled as non-performing assets (NPAs) as on December 31, 2020, with loans for engineering and nursing courses topping the chart.

Job and income loss and drop-out rates during the pandemic were key factors behind the surge in education loan NPAs.

Rising unemployment rate is posing major challenges to the banking system as the repayment ability of the borrowers are getting impacted accordingly.

About Rs 8,587 crore loans over 366,260 accounts have turned bad as of December 2020.

As on December 31, 2020, there are 24.84 lakh education loan accounts with an outstanding of Rs 89,883.57 crore across the country. Out of these, about 9.55% or 3.66 lakh accounts with an outstanding of Rs 8,587.10 crore have turned NPAs, the parliament was informed.

The highest defaults were in loans extended for engineering courses as Rs 4,041.68 crore spread over 176,256 accounts as on December 31, 2020.

COVID-led spike

Interestingly, the NPA rate has dropped to 7.61% in FY20 end from 8.11% in FY18. It stood at 8.29% in FY19. The category has witnessed higher NPAs than other categories of retail loans including housing, vehicle, that saw bad loans in the range of 1.52% and 6.91% in FY20 While NPAs in the housing, vehicle and other retail sector loans have remained below 2%, consumer durables NPAs have trebled to 6.91% as on March 2020 from 1.99% in March 2018.

Reserve Bank of India
Reserve Bank of India

Rising graph

Led by a rise in lending to micro and small, and medium industries, bank loans to the industry sector grew a 4.1% on year in October, sharply higher than 2.5% a month ago and contraction of 0.7% a year ago, according to the RBI data.

Loans to large corporates rose 0.5% (on a year-on-year basis) to Rs 22.7 lakh crore in October compared to a contraction of 1.8 % a year ago.

All major segments, except services including agriculture, industry and retail posted higher growth rates over the previous year. Overall bank credit rose 6.9% in October compared to 5.2% a year ago according to the latest data on sectoral deployment of bank credit released by the Reserve Bank of India.

Government schemes like emergency credit guarantee schemes targeted at such borrowers also seemed to have played a part in the pick-up in lending to these corporate borrowers during the festival season.

The 10.7% growth in gross capital formation in Q2’21-22 is driven primarily by public capital expenditure although there are also signs of a pickup in private capex in the current fiscal.



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PM Modi, BFSI News, ET BFSI

Banking & Finance

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Underlining the reforms made by the Centre to improve the financial health of banks, Prime Minister Narendra Modi on Thursday said the banking sector of India is currently in a major milestone phase that can give a great push to the country’s economy.

Addressing the concluding session of the conference on “Creating Synergies for Seamless Credit Flow and Economic Growth” Prime Minister Modi said, “The reforms made by the government in the banking sector in the last 6-7 years led the banking sector of the country towards a very strong position today. The financial health of banks is now in a much-improved condition. We brought reforms like IBC, reformed many laws, empowered Debt recovery tribunal.”

He said a dedicated Stressed Asset Management Vertical was also formed in the country during the COVID period.

“We have found ways to solve problems and challenges that were there before 2014. We addressed the problem of Non-Performing Assets (NPA). We recapitalized the banks and increased their strength. Today the capacity of the banks of India has increased so much that they can play a great role in giving new energy and a great push to the economy of the country and making it self-reliant. I consider this phase as a major milestone in the banking sector of India,” he added.

The Prime Minister further said banks should adopt the model of partnership leaving the traditional approver-applicant system.

The two-day conference is being organised by the Ministry of Finance from November 17. The conference has been attended by top officials from Ministries, Banks, Financial institutions and Industry representatives. (ANI)



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RBI imposes Rs 90 lakh penalty on Vasai Vikas Sahakari Bank, BFSI News, ET BFSI

Banking & Finance

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The RBI on Tuesday said it has imposed a Rs 90 lakh penalty on Vasai Vikas Sahakari Bank, Maharashtra, for non-compliance with certain directions, including on classification of loans as NPAs, and other directions. In a statement, the Reserve Bank said the bank had not complied with its directions on ensuring end-use of funds in borrowal accounts and classification of loans/ advances as non-performing assets, specific direction of RBI for ensuring that the bank’s balance sheet and profit and loss account are signed by at least three of its directors.

This was revealed following the statutory inspection of the bank with reference to the bank’s financial position as of March 31, 2019, the Inspection Report pertaining thereto and examination of all related correspondence, the central bank said.

The penalty was imposed after considering the bank’s replies to a show-cause notice and oral submissions made during the personal hearing, the RBI said.

In another statement, the RBI said it has imposed a monetary penalty of Rs 7 lakh on The Citizens Urban Co-operative Bank, Jalandhar, Punjab for “non-adherence with/violation” of certain directions related to non-identification of NPAs, wrong classification of assets and inadequate provisions made due to the wrong classification of assets.

In both cases, the RBI said, penalities were based on the deficiency in regulatory compliance and not intended to pronounce upon the validity of any transaction or agreement entered into by them with their customers.



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As India’s bad bank knocks, ARCs seek relaxations from RBI, BFSI News, ET BFSI

Banking & Finance

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With the bad bank on the anvil, asset reconstruction companies have sought relaxation of the pricing structure for the purchase of bad loans, funding from banks, and clarity on participating in insolvency cases as a resolution applicant. These are among the suggestions made by ARCs to the committee formed by the Reserve Bank of India in April.

Usually, sales take place either on a full-cash basis or under the 15:85 structure, where 15% is paid as upfront cash and the remaining in the form of security receipts.

ARCs have sought a reduction in the minimum investment requirement to 2.5% from 15% in cases where cash is fully paid upfront.

The cash proportion of 15% has pushed the ARCs to raise their returns through securitisation and asset reconstruction.

Unless the ARC recovers 130% of the acquisition value, it will not make its return. Even at 100%, an ARC will make a loss because the management fee of 1-2% doesn’t make any ARR for ARC. Recovery should be over 130% so that 100% of security rights will be redeemed.

Also read: What are NARCL and IDRCL? How do they work and what is the plan?

Also, in September 2016, the Reserve Bank of India introduced new regulatory guidelines regarding provisioning. From April 2018 banks have to sell at 90% cash and 10% SRs. If a bank holds more than 10% SR, it had to continue provisioning for the loan which is not even on their books. So there is no incentive for them to transfer to ARCs. Now no banks transfer on 15:85 and all deals are in cash.

Bank funding

Asset reconstruction companies have asked RBI to allow bank funding for them on the lines of provided to non-banking finance companies. They have also sought doing away with dual-provisioning norms, a move which will benefit banks the most.

ARCs have suggested that bank provisioning needs to be solely based on the rating agency-determined net asset value of the security receipts.

From April 2018, banks have had to make provisions for stressed assets that are sold, assuming they remain on the books. This is applicable in cases where security receipts make up for more than 10% in the sale of non-performing assets.

Banks also have to make mark-to-market provisions in cases where the rating of security receipts is downgraded. Security receipts are valued on net asset values, linked to recovery ratings, which is an assessment of probable recovery from an underlying non-performing asset by rating agencies.

With banks not having to go for dual provisioning, they sell NPAs on a 15:85 structure, making more NPAs available for ARCs.

Currently, outstanding security receipts are estimated to be around Rs 1.1 lakh crore.

The RBI committee

In April this year, the RBI has formed a six-member panel under the chairmanship of Sudarshan Sen, former RBI executive director, to examine the role of asset reconstruction companies (ARCs) in stressed debt resolution, including under the Insolvency & Bankruptcy Code (IBC), 2016 and review their business model.

The committee is reviewing the legal and regulatory framework of ARCs and recommend measures to improve their efficacy. It will submit its report within three months from the date of its first meeting. As of January, the number of ARCs registered with the RBI stood at 28.



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Banks’ credit outlook ‘stable’ for FY22, says Crisil Ratings, BFSI News, ET BFSI

Banking & Finance

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Crisil Ratings has kept a ‘stable’ credit outlook for banks for the second half of financial year 2022.

Strong capitalisation will remain a key factor for private banks to have a stable credit growth, while public sector banks benefit from government support.

However, privatisation of two public sector banks, as announced in Union Budget 2021-22, will be eyed.

Banks’ credit growth is expected to revive 9-10% in FY22, after a fall of around 5% in FY21, the agency said, adding that profitability of the banking sector is set to improve over the medium term.

Gross non-performing assets are likely to touch 10-11% by the end of this fiscal.

According to reports, the GNPA is at 8-9%, supported by government schemes and restructuring dispensation, the agency said. In FY18, the GNPA had hit a peak of 11.2%.

The NPA level improved because banks have lowered their provisioning levels from before, thereby limiting the impact of legacy NPAs on future earnings, Crisil said, in its half yearly ratings round up report.

Retail segment growth is expected to return to the mid-teens this fiscal, after a slow growth reported a year ago. Within retail, housing loans, which constitute more than half of retail advances for banks, saw slow growth last fiscal, but demand remains strong over the long term, the agency said.

With rising affordability and the recent trend of working from home, demand for own houses and larger houses are likely to rise, and banks will benefit from lower competition from non-banks as well as surplus liquidity, it added.

However, a potential third COVID-19 wave remains a key near-term risk, while deceleration in economic and demand growth, both global and domestic, due to tapering of monetary and fiscal stimuli will be key medium-term risks.

The impact of the third wave is likely to be contained due to the increase in the pace of inoculations, with nearly 70% of the adult population receiving at least one dose.

For non-banking financial companies, the agency expects better credit quality than last year, but has retained a ‘monitorable’ outlook.

The credit quality growth for NBFCs is expected to pick up to 6-8% in FY22 from 2% in FY21. However, it remains lower than the pre-pandemic level of 18%.

Crisil expects NBFCs to witness an uptick in stressed assets as MSME and unsecured loans have been hit the most. However, loans to other sectors have been relatively resilient.

Asset quality in these segments continue to be impacted the most, with delinquencies rising almost 300 basis points in June 2021 against March 2021 levels, despite higher restructuring and write-offs last fiscal compared with other asset classes. Delinquency levels for these segments will remain elevated given a likely higher recovery period for borrowers, Crisil said.

Improved capitalisation and strong parentage will be key support factors for non-bank lenders. The agency noted that many NBFCs have strengthened their provisioning buffers, factoring in the COVID-19 crisis, leading to more comfortable liquidity in the sector.

Crisil expects the sector to witness organic consolidation with stronger NBFCs, who have strong parentage, and gain market share.

Performance on asset quality and impact on earnings will remain key monitorables for NBFCs.



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Banks put loans worth over Rs 10,000 crore on sale in Q2

Personal Finance

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Bank of Baroda has also put one home loan account on sale.

Fifteen banks have placed bad loans worth a total Rs 10,201 crore on sale to asset reconstruction companies (ARCs) so far during Q2FY22, data compiled by FE showed. The assets on the block include some large accounts as well as some loans to small businesses where exposure is under Rs 50 crore.

Lenders have been looking to offload some retail and micro, small and medium enterprises (MSME) loans as also some larger non-performing assets (NPAs) where they expect quick resolutions through an auction process.
Some of the large assets which are at various stages of the auction process include JBF Industries, Imagicaaworld Entertainment, JBF Petrochemicals, Sew Infrastructure and IVRCL Chengapalli Tollways.

In Q1, recovery of Rs 5,824 crore in the stressed Kingfisher Airlines had boosted the profits of quite a few public sector banks.

At the same time, smaller enterprise borrowers account for a chunk of the NPA sale lists of some banks, such as Bank of Baroda. The bank is seeking buyers for loans worth Rs 2,378 crore, including accounts where the asset is being offered by the whole consortium. Its sale list includes a large number of accounts where the exposure ranges between Rs 1 crore and Rs 20 crore. Bank of Baroda has also put one home loan account on sale.

Quite a few ARCs in the private sector have been showing interest in acquiring smaller NPAs in the retail and MSME segments, which have been hit harder than corporates by the Covid-19 pandemic. In previous quarters, too, banks such as IDBI Bank have tried to sell retail NPAs, but disagreements over pricing are understood to have led the lender to hold on to those loans.

“Retail NPA sales are more common by non-banking financial companies and smaller private banks. Public sector banks are not too active in the segment,” said a senior executive with an ARC, adding that activity in this segment is likely to increase.

Bankers, analysts as well as the Reserve Bank of India have been flagging the rising levels of delinquencies in the retail and MSME segments. Smaller loans are becoming a more significant area of activity for ARCs as the National Asset Reconstruction Company gets set up to resolve NPAs of over Rs 500 crore.

In a recent report, rating agency Crisil said, “ARCs are expected to circle stressed accounts in the MSME and retail segments in the near-to-medium term, given the twin challenges of inadequate funding access and intensifying competition once the proposed National ARC materialises.”

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Are bad banks really good?

Banking & Finance

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Along with NARCL, India Debt Resolution Company Ltd (IDRCL), has also been set up, it will then try to sell the stressed assets in the market. (Representative image)

By Sandesh Dholakia

A few days back, in one of her key announcements Finance Minister Nirmala Sitharaman made good on one of her promises from the Budget 21-22 and announced the formation of India’s first-ever “Bad Bank”. National Asset Reconstruction Company (NARCL) which has already been incorporated as a company and received cabinet approval will acquire stressed assets worth Rs. 2 lakh crores from various banks in order to recover them. Along with NARCL, India Debt Resolution Company Ltd (IDRCL), has also been set up, it will then try to sell the stressed assets in the market. This NARCL-IDRCL structure is the new “Bad Bank of India.”

But why do we really need a Bad Bank ?

Insolvency and Bankruptcy Code (IBC), Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI Act), Debt Recovery Tribunals as well as setting up of dedicated Stressed Asset Management Verticals (SAMVs) in banks for large-value NPA accounts have brought much-needed focus on the recovery of non-performing assets. In spite of such efforts, a substantial amount of NPAs continues on the balance sheets of banks primarily because the stock of bad loans as revealed by the Asset Quality Review is not only large but fragmented across various lenders.

 

The situation becomes even duller when we benchmark India with other leading G-20 nations. As per World Bank data, the share of NPA to gross loans in Indian banking is significantly higher compared to all other leading G-20 nations with an exception of the Russian Federation. Large unresolved NPAs over a sustained period of time have proven detrimental to policymaking and economic growth for many economies in the past.

 

How will the new Bad Bank structure function ?

NARCL proposes to acquire Rs. 2 Lakh crores of (gross value) assets. As per the Secretary DFS, blended net realizable value of these assets is likely to be ~18% i.e. Rs. 36,000 crores (Rs. 30,000 crores post-tax). 15% of the net realizable value will be in the form of cash and rest through security receipts(SR).

GOI guarantee on SRs will be good between net realizable value and actual realized value. In a normal Asset Reconstruction Company (ARC) transaction, cash realization is recorded upfront and flow to profits and SRs are subject to MTM. Due to uncertainty on recovery, these SRs are illiquid hence locked capital for banks. Under the scheme, SRs are guaranteed by GOI so it will provide liquidity to SR and free up capital on immediate basis post conclusion of sale.

Let’s understand through an example : –

Let’s say a loan of Rs. 10,000 was written-off by a bank –

The book value of asset in bank’s balance sheet is zero

If the bad bank determines the recoverable value at 30% or Rs. 3,000 then:

Bad bank will have to pay 15% of Rs. 3,000 = Rs. 450 (or 4.5% of original loan value) – this will be paid in cash by bad-bank, which may source funds from banks themselves as equity. From accounting perspective, banks will report Rs. 450 as profit from recoveries of written off loans that gets added to net worth.

For the balance 85% of Rs 3,000 = Rs. 2,550 – bad bank will issue securitisation receipts (SRs) which will be partly guaranteed by government and partly non-guaranteed. For the guaranteed part, banks will recognise the value as investment but that will not require any capital for 5yrs as there is Govt. guarantee. For non-guaranteed part, banks might not recognise value until actual recovery is made.

What does the Global Experience say about Bad Banks?

 

Way forward for Bad Bank of India –

Aggregation of stressed assets at one entity’s hand is undoubtedly expected to speed up the process for finding interested buyers, transfer of assets, restructuring of debt etc. but more than anything else the quality of such asset will matter the most. Historically we have seen proven examples of formation of Bad Banks working, most of it were in the cases where not only a law was passed but the enforcement of it was done properly. A plenty of it also relied on the evolving socio-economic and political conditions of the country.

As India recovers from its hardest ever economic hit due to Covid-19 the challenges going to be faced by the Bad Bank are not going to be easy but if tackled properly this could provide a much-needed moment of renaissance to the entire Indian Banking Sector.

(The author is founder & CEO at Case Ace and Asia-Pacific chairman at International Finance Students’ Association. Views expressed are personal.)

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How did public sector banks become profitable in FY21?, BFSI News, ET BFSI

Banking & Finance

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Finance Minister Nirmala Sitharaman last week, while making the announcement of the National Asset Reconstruction Company Ltd, claimed that the performance of public sector banks has improved, with just two public sector banks reporting losses.

“In 2018, just two out of 21 public sector banks were profitable. But in 2021, only two banks reported losses for the full year,” she had said.

Also read: Finance Minister Sitharaman announces bad bank, Cabinet approves backing of up to Rs 30,600 crore

From 2015, when the Reserve Bank of India conducted an Asset Quality Review (AQR), public sector banks started to make a lot of provisions in their loans. Non performing assets in the banking sector jumped 80% in FY16, according to RBI data, quoted in the July 2015 AQR.

The AQR created havoc on banks’ profitability, especially affecting state-owned banks because majority of their loans were provided to corporates.

Banks had been directed to keep increasing provisioning of accounts that were restructured from 5% to 15%, and accounts that were classified as sub-standard (first category of NPA), would slip into doubtful category if it stayed sub-standard for 12 months, attracting 40% provisioning. And if the loan is not serviced at all, the bank would have to treat it as a loss account with 100% provisioning.

Major PSBs reported record losses for the first time in the fourth quarter of FY16, like Bank of Baroda with Rs 3,230 crore and Punjab National Bank with Rs 5,367 crore.

Banks entered an NPA cycle, till 2021. The government came out with two major relief measures – recapitalisation, starting 2017, and merger of smaller public sector banks with large anchor banks.

Also read: Several NPAs transferred to bad bank may head to liquidation, cost govt a bomb

“Mergers of the banks is the step in the right direction as fewer banks with larger balance sheets would be able to compete better in the market,” said Yuvraj Choudhary, research analyst at Anand Rathi Financial Services.

In FY18, there were a total of 21 public sector banks, and as Sitharaman said, only two public sector banks reported profits – Indian Bank and Vijaya Bank.

“PSBs were reeling under corporate asset quality burden for long, more so after RBI’s AQR exercise. This was aggravated by forced mergers, which led to losses due to accelerated recognition and provisioning. Growth too decelerated as banks were busy with merger and had capital constraints,” an analyst with Emkay Global Financial Services said.

PUBLIC SECTOR BANKS FY18 STANDALONE NET PROFIT/LOSS (in Rs)
State Bank of India (-) 6,547 crore
Punjab National Bank (-) 12,283 crore
Bank of Baroda (-) 2,432 crore
Bank of India (-) 6.044 crore
Central Bank of India (-) 5,105 crore
Canara Bank (-) 4,222 crore
Union Bank of India (-) 5,247 crore
Indian Overseas Bank (-) 6,300 crore
Punjab & Sind Bank (-) 744 crore
Indian Bank 1,259 crore
UCO Bank (-) 4,436 crore
Bank of Maharashtra (-) 1,146 crore
Oriental Bank of Commerce (-) 5,872 crore
United Bank of India (-) 1,455 crore
Andhra Bank (-) 3,413 crore
Allahabad Bank (-) 4,674 crore
Corporation Bank (-) 4,054 crore
Syndicate Bank (-) 3,223 crore
IDBI Bank (-) 8,238 crore
Dena Bank (-) 1,923 crore
Vijaya Bank 727 crore

Starting FY21, only 12 state-owned banks have remained. Six weaker PSBs had been merged with four anchor banks – Andhra Bank and Corporation Bank were merged with Union Bank, Oriental Bank of Commerce and United Bank of India with Punjab National Bank, Syndicate Bank with Canara Bank, and Allahabad Bank with Indian Bank.

In 2019, Dena Bank and Vijaya Bank were merged with Bank of Baroda, and IDBI Bank was recategorised as a private bank, with Life Insurance Corporation of India buying 51% stake. So far, IDBI Bank is the only PSB that has been privatised.

Mergers of public sector banks aided in reducing operation costs for the banks, but banks are not in the position to absorb any weak banks, according to analysts. “This is true even for SBI. Privatization of weak banks is the best way to weed them out,” the analyst at Emkay Global said.

Though mergers had caused a bit of a correction in the PSBs’ profitability earlier, mergers did not have any role to play in their profitability in FY21, analysts said.

“PSBs have turned profitable since past few quarters mainly due to healthy treasury gains and some lumpy corporate resolutions, (for eg. Bhushan Power). Impact of COVID-19 on corporate portfolio was relatively moderate, leading to further moderation in NPAs and lower incremental provisioning, which supported profitability,” the analyst at Emkay Global said.

Of the 12 banks, only two reported losses in FY21 – Punjab & Sind Bank and Central Bank of India.

PUBLIC SECTOR BANKS FY21 STANDALONE NET PROFIT/LOSS (in Rs)
State Bank of India 20,410 crore
Punjab National Bank 2,022 crore
Bank of Baroda 829 crore
Bank of India 2,160 crore
Central Bank of India (-)888 crore
Canara Bank 2,558 crore
Union Bank of India 2,905 crore
Indian Overseas Bank 831 crore
Punjab & Sind Bank (-)2,732 crore
Indian Bank 3,004 crore
UCO Bank 167 crore
Bank of Maharashtra 550 crore

Sitharaman, at the press conference last week, also said that banks have recovered Rs 3.1 lakh crore since March 2018.

This was possible because sizeable recovery from lumpy corporate NPAs, by way of cash and write-offs, was expected. Some resolutions including Essar, Bhushan, were major contributors to these recovery numbers, analysts said.

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How banks in Europe are managing bad loans, BFSI News, ET BFSI

Banking & Finance

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Credit crunch was beginning to become a major problem for banks in Europe, however, they seem to have found a way to tackle the issue.

Non-performing assets in European banks were piling up due to COVID-19. As of the second quarter of 2020, the NPA ratio for all banks in the region was at 2.8%, up 0.2 percentage points from a year ago.

According to reports, banks set aside lower provisions for potential loan losses in the second quarter of 2021, with UK banks booking significant reversals. Booking reversals here means that overall funds that accounted for bad loans shrank, making risk from bad loans manageable, according to analysts.

According to data by S&P Global Market Intelligence, 12 of the 25 largest banks in Europe booked reversals, and loan loss provisions have been put aside to cover potential costs arising from defaulting loans.

Of the 12 — Barclays PLC, NatWest Group PLC, Lloyds Banking Group PLC, HSBC Holdings PLC and Standard Chartered PLC — are based in the UK, with Barclays releasing the highest amount of 911 million euros, according to their data.

So far, banks have not seen a surge in bad loans. However, with talks of central banks moving towards tapering COVID-19 support, the market expects deterioration in asset quality.

This is likely to be more visible in 2022 and will happen gradually rather than suddenly since the measures will not end all at once, DBRS’ Rivas told S&P Global.

If banks do need top-up provisions due to additional bad loans in pandemic-affected sectors, the risks would likely be against earnings rather than capital, said S&P Global Ratings’ Edwards.

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Several NPAs transferred to bad bank may head to liquidation, cost govt a bomb, BFSI News, ET BFSI

Banking & Finance

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The government has announced the setting up of National Asset Reconstruction Company Ltd with much fanfare and committed over Rs 30,000 crore guarantee for bad assets acquired by it, but it may be used up soon, going by the initial assets going by the list of assets proposed to be transferred to the bad bank.

Banks have identified Rs 82,496 crores worth of bad loans that could be transferred to the NARCL, which includes the following companies.

COMPANIES TOTAL BAD LOANS
Videocon Rs 22,532 crore
Reliance Naval & Engineering Rs 8,934 crore
Amtex Auto Rs 9,014 crore
Jaypee Infratech Rs 7, 950 crore
Castex Technologies Rs 6,337 crore
GTL Ltd Rs 4,866 crore
Visa Steel Rs 3,394 crore
Wind World India Ltd Rs 3,161 crore
Lavasa Corporation Rs 1,424 crore
Consolidated Construction Consortium Ltd Rs 1,353 crore

Also read: NARCL will empower lenders, but recovery from 26 accounts is not easy, industry says
Several assets such as Videocon have seen realisable value close to liquidation value in National Company Law Tribunal proceedings. Many big-ticket resolutions at Insolvency and Bankruptcy Code have seen haircuts over 90%. With most of the NPAs proposed to be transferred to the bad bank being old legacy ones, there has been an erosion in value, making them more likely to head to liquidation.

Lavasa Corporation has got bids worth Rs 700 crore for loan claims of over Rs 8,000 crore at NCLT.

Several NPAs transferred to bad bank may head to liquidation, cost govt a bomb

Close to liquidation

Though banks have made 100% provision for these assets, even Rajkiran Rai, chairman of Indian Banks Association, and MD & CEO of Union Bank of India does not expect more than 20-25 per cent recovery from these legacy accounts, he told a television channel.

The State Bank of India has identified NPAs with Rs 17,000-18,000 crore outstanding to be transferred to the NARCL, while Punjab National Bank has identified Rs 8,000 crore worth of NPAs, Union Bank of India Rs 7,800 crore of NPAs to be transferred to the National ARC. The Bank of India has identified about Rs 5,500 crores of assets for transfer while Indian Bank about Rs 1,900 crore.

“I am not hopeful. Because these are bad assets. Finally, all these will go under liquidation,” Siby Antony, chairman of the ARC Association of India.

The bad bank

Finance Minister Nirmala Sitharaman announced a Rs 30,600 crore government guarantee for the National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets, paving the way for operationalisation of the bad bank.

Also read: Finance Minister Sitharaman announces bad bank, Cabinet approves backing of up to Rs 30,600 crore

The finance minister in Budget 2021-22 announced the setting up of a bad bank as part of the resolution of bad loans worth about Rs 2 lakh crore.

The bad bank or NARCL will pay up to 15 per cent of the agreed value for the loans in cash and the remaining 85 per cent would be government-guaranteed security receipts (SRs). The government guarantee would be invoked if there is a loss against the threshold value.

Also read: What are NARCL and IDRCL? How do they work and what is the plan?

This sovereign guarantee would be for a period of five years and NARCL would have to pay a fee for this.

“The SRs are getting the backstop through government funding only in as much as to pay the gap between the realised value (resolution/liquidation) and the face value of SRs and this will hold good for five years,” Sitharaman said.

The fee for the guarantee would be initially 0.25 per cent, which would progressively increase to 0.5 per cent in case of delay in resolution of bad loans.

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