WIDER MARKET FOR STRESSED ASSETS

BE/RBI/18/2016

RBI has come out with a scheme, which it expects would result in better realization of stressed assets.  This is expected to widen the market for the sale of stressed assets. Precisely RBI permits the banks, to sell these assets to other banks, non-banking financial companies or any other financial institutions which was hitherto restricted to only securitization companies/reconstruction companies.

What are the expected results?

1. This plan should possible widen the scope of those who can participate in the process.
2. The sale of stressed assets to asset reconstruction companies may come down.
3. Market will become more liquid and banks would engage in cash sales as there has been a change in the provisioning requirements with regard to securitization receipts.
4. The bank boards would be able to take positive and faster action on non-performing assets to ensure the value of collateral is not impaired significantly.
5. The regulator has advised that from April 1, 2017, when the Securitization Receipts are more than 50 per cent of the amount of assets sold, the bank should make higher provisioning, which inturn should either be net asset value declared by securtitization companies or reconstruction companies or provisioning as if it was a direct loan exposure. From 32018 April 1st, the threshold of 50 per cent will be reduced to 10 per cent.

However, there are lacunae in the system, from the banks’ perspective. What are they?

1. It would take some more time before it becomes effective.
2. This news has come when banks are saddled with high levels of bad loans wherein it is difficult to imagine they will be actively participating in the market to bujy more stressed assets and thereby resolve them.
3. Banks will be required to continue with loan loss provisioning even if stressed assets are sold to ARCs. Precisely this should have been done by RBI long ago.
4. Banks are not in a mood to sell stressed assets at this stage, as ARCs are also using Sarfaesi Act and so are the banks to recover the dues.  With this change, the advantage is now rid with, banks may not be interested in selling stressed assets to ARCs.