Friday, November 23, 2007

In realty, banks loath to cast off bad assets

Spiralling property prices and new loan transaction rules are holding back many banks from selling their bad debt. Even if the defaulting companies fail to come out of the red, bankers are betting that the real estate locked up in sick companies would fetch far more than the sale of non-performing assets (NPAs) to asset reconstruction companies (ARCs) or other institutions. Such sales are usually at a discount.
While the behaviour of banks can be partly attributed to NPA levels, which are at a record low of less than 1% of total advances, there are other reasons. The number of stress asset deals have also fallen due to new rules by the Reserve Bank of India and government. Earlier, a bank could sell off a parcel of stick loan assets at a considerable discount. Not any longer.
The regulator has now set a floor price for any such deal. This price is the net present value of the cash flow from the asset. As this can be significantly higher than the heavy discounts offered in earlier deals, the ARCs no longer find it lucrative.
Secondly, the government’s decision to treat optionally convertible debentures (OCDs) and preference shares as external commercial borrowings (ECBs) has put off many vulture funds, which were using these instruments to buy bad loans from banks. In these structured deals, overseas funds were using the automatic FDI route to subscribe to OCDs floated by local companies and NBFCs who in turn used the money to buy bad debt from banks. As ECBs (or foreign loans) have a cap on interest, foreign funds no longer find such deals attractive.
Bankers are hoping that the sustained rise in real estate prices, particularly commercial properties, will at some point make these sticky assets valuable. Most NPAs are non-operational companies backed by fixed and real estate assets. “Going forward, bad assets are going to add straight to our bottom line. These accounts will yield better realisation, once prices of real estate assets appreciate further,” said a senior banker.
The industry sold about Rs 4,000 crore in distressed assets spread over the entire 2006-07. Of the estimated Rs 1 lakh crore of bad assets in the system, less than a third have gone off the books in the last few years. An asset reconstruction company official said Punjab National Bank, State Bank of India, Indian Bank and Punjab & Sind Bank are some of the banks that are finding it difficult to sell their bad assets because they are not getting the right price.
“With reduction in interest rates and significant treasury profits over the 2003-2006 period, focus on resolution of NPAs and strong macroeconomic growth, net NPA levels for most of the banks are at comfortable levels and not perceived as a systemic risk.
In view of this limited pressure, expected strong macroeconomic growth and expected increase in real estate prices, banks are willing to wait before disposing off their NPAs,” said PricewaterhouseCoopers executive director Neeraj Garg.
Some bankers think the discount for bad loans is too high. However, others would still prefer selling off their loans and cleaning up their balance sheets ahead of the implementation of Basel norms. If a bank sells bad loans, its profitability increases as it does not have to provide for them. As banks are holding onto NPAs, they will have to continue to provide for such loans.
Kesar Dass B & Associates (corporate lawyers) partner Sumant Batra said, “Banks are neither offloading their NPAs nor resolving them on a long-term basis, since they hope to recover more by expecting bad accounts to turn around by sheer dynamics of economic growth. This leads to window dressing which may interfere with corporate governance norms.
Banks are reluctant to use resolution processes as prescribed by corporate restructuring law as they can be unpredictable. External experts are not involved in restructuring process, since NPA resolution is mostly handled in-house.”
A recent Assocham survey revealed that in spite of high interest rates slowing down credit offtake, banks have not seen any major reduction in their NPAs because they are lending less. Incidentally, some banks like ICICI Bank and Centurion Bank of Punjab saw an increase in their bad debts, said the Assocham study.
“Though there has been a small change in macroeconomic fundamentals with the hardening of interest rates, it is unlikely to influence debt servicing abilities,” a banker said.


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