Money & Banking
Why the new RBI guidelines for sale of stressed assets are unrealistic
The Reserve Bank of India (RBI) on 1 September 2016 issued Guidelines on Sale of Stressed Assets by banks. The Guidelines are an attempt to improve the framework for sale of stressed accounts by banks. The essence of the Guidelines is urging banks to create mechanism for timely identification of stressed accounts and take appropriate actions to ensure there is low vintage and better price realisation for banks.
 
The guidelines view the world with rose-tinted glasses. Currently the non-performing asset (NPA) levels in the financial system are extremely high and are causing sleepless nights to the Boards of banks and financial institutions. In such times where there is a dire need for quick resolution, the Guidelines are optimistic about finding takers for bad assets and creating dynamic market for the same outside of ARCs as well. While this is the core area for ARCs and special situation funds (which the guidelines do not make a mention of at all), there may be very little or no motivation for other non-banking financial companies (NBFCs) or banks to acquire bad loans.
 
The Guidelines also seem to suggest that the sale of junk should be undertaken by an open auction process, which will result in price discovery. The existing Framework for Revitalising Distressed Assets in the Economy as applicable to banks and issued on 26 February 2014 mentioned that there were practically challenges in sale of assets through auction process. The bidding process is quite costly and the due diligence takes long. The framework urged for creating transparency in the auction process and required prescription of sufficient disclosures for seamless auction process. Unfortunately, none of these issues from the 2014 Framework are addressed in the new Guidelines. We highlight the prescriptions of the recently issued Guidelines in this article. 
 
Process of identification of stressed assets 
 
The Guidelines mandate the banks to do the following:
 
1. Early identify stressed assets and special mention accounts and make them available for sale. 
 
2. Identify and list internally, once a year (preferably at the beginning of the year), specific financial assets available for sale to other institutions.
 
3. Doubtful assets above a threshold should be identified and reviewed by the board or its committee to make them available for sale.
 
4. The sale should be undertaken through e-auction process, so as to attract wide variety of buyers and enable larger participation from prospective buyers. 
 
5. At the time of sale, specifications should be provided for acceptance of internal or external valuations. In case of exposure beyond Rs50 crores, take 2 external valuation reports.  
 
6. Banks should provide adequate time for due diligence with a floor of 2 weeks’ time.
 
7. Cost of valuation to be borne by banks
 
Eligible buyers of banks’ junk
 
Banks can sell the stressed assets to:
 
a. Asset reconstruction companies; 
b. Other banks; 
c. Non-banking financial companies; 
d. Financial institutions.
 
Preference will be given to asset reconstruction companies as buyers. 
 
Swiss Challenge Method
 
This is the prime focus of the Guidelines. As in case of government tenders and bidding, Swiss Challenge Method is envisaged to be introduced for sale of stressed assets as well. The mechanism is as follows:
 
1. Prospective buyer gives a bid to the bank for acquisition of assets;
 
2. Where a prospective buyer offers more than the minimum percentage specified in the bank’s policy in the form of cash, the bank shall be required to publicly call for counter bids from other prospective buyers, on comparable terms; 
 
3. Once bids are received, the bank shall first invite the securitisation companies (SCs) and reconstruction companies (RCs), if any, which has already acquired highest significant stake to match the highest bid. Asset Reconstruction Companies (ARCs) acquiring majority stake and bidding highest will be given a right of first refusal for acquiring the assets 
 
4. The order of preference to sell the asset shall be as follows: 
 
a. The SC or RC, which has already acquired highest significant stake;
b. The original bidder and 
c. The highest bidder during the counter bidding process.
 
5. In any event, preference will be given to asset reconstruction companies to acquire the assets
 
6. Bank may sell to the winning bidder otherwise make provision which would be higher of the two:
 
a. The discount on the book value quoted by the highest bidder; and
b. The provisioning required as per extant asset classification and provisioning norms
 
Investment in security receipts (SRs)
 
Banks typically sell the stressed assets to the ARCs and then hold them in the form of security receipts. This is a way of creating a façade whereby the banks continuing to hold the bad assets as investment. The guidelines state that where banks continue to hold 50% or more of security receipts with the underlying of the assets it sold to the ARCs, then higher of the below mentioned provisioning norms shall apply
 
a. Provisioning rate required in terms of net asset value declared by ARCs
b. Provisioning rates as applicable to banks
 
The above provisions will become applicable from 1 April 2017. The threshold of 50% investment in SRs will be reduced to 10% from 1 April 2018. 
 
In addition, banks will be required to do disclosure of SRs acquired and the disclosure goes 8 years backward. 
 
Buy-back of refurbished junk
 
The Guidelines state that the Banks should have a board approved policy to buy-back financial assets from asset reconstruction companies once the asset has become standard after successful implementation of the restructuring program by the ARCs and after satisfactory performance of the asset during the specified period. 
 
However, banks cannot buy-back the assets they sold to the ARCs. This means banks can buy someone else’s refurbished junk but cannot buy-back its own. 
 
Banks to formulate policies 
 
In light of the Guidelines issued, banks will be required make changes in their policies dealing with stressed assets. The following are the changes or policies required:
 
1. Banks to lay down board approved policies and guidelines for sale of stressed assets, which would include  
 
a. Types of financial assets to be sold
b. Norms and procedures for sale 
c. Valuation procedure to be adopted and policy for valuation either to be taken internally or externally.
d. Delegation of powers for undertaking the sale of financial assets 
e. Discount rates used for valuations will be provided for in the policy
f. Minimum percentage/ floor of cash expected in case of sale 
 
2. Banks will require a board approved policy for buy-back of financial assets. The policy should provide for facets such as type of assets that may be taken over, due diligence requirements, viability criteria, performance requirement of asset, etc. 
 
3. The existing NPA policies should be reviewed and revised in lines with the Guidelines. 
 
Selling of bad loans is not a thriving business where price discovery is the primary agenda, neither is broadbasing investors in junk the agenda. However, the Guidelines do focus on sensitising the banks by saying a stitch in time will save nine.
 
(Nidhi Bothra is executive vice president at Vinod Kothari Consultants Pvt Ltd)
 

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COMMENTS

T.c. Shivswamy

1 year ago

There is nothing original in this.This is what the US did resulting in hundreds of Banks and Financial institutions going Bankrupt.Our US modelled Central Bankers ape their Gurus.

Mahesh S Bhatt

1 year ago

Match fix nahi ho raha Mahesh

Gupta

1 year ago

Rajan isn't wearing rose tinted glasses as the author says.... probably the author is wearing coal tinted glasses! :-)

Gupta

1 year ago

Is it a rule that we have to criticise everything? While moneylife comes up with brilliant topics and analysis, one thing that is worrisome is that everything is viewed with suspicion. These are marvellous guidelines which may not solve the problem of current bad loans, but it is intended to force banks to not postpone the problem by restructuring. Banks will be forced to make provisions faster and will almost be marking Loan values to market price. If you know how large borrowers arm twist banks to restructure, you will realise what a sea change these guidelines bring. What it does is to force banks to take the most effective commercial decision rather than a temporary accounting solution by deferring the problem. These guidelines will force provisioning anyway and will take away the incentive of restructuring. More importantly, the fear of these new guidelines which will lead to more provisioning will improve Credit decisions as the corrupt bankers can no longer hope to be retired by the time the bomb they created explodes. The new guidelines will trigger the explosion much much sooner. These are excellent innovative ideas and only talented people like R3 could do this. Kudos to Rajan, what a loss for India.. ... sad.

Central bank seeks to dispel rumours about KYC guidelines
The Reserve Bank of India has sought to dispel rumours and curb malpractices in banks on the pretext of Know Your Customer (KYC) norms by issuing clarifications on the guidelines.
 
The RBI guidelines say: "If your current address is not the same as the proof submitted to your bank, a simple declaration of your new address is adequate."
 
Even without the "proof of identity and address", anyone can open a savings bank "small account" by submitting a recent photograph and signature and enjoy account balance of up to Rs 50,000, withdrawals of up to Rs 10,000 per month and total credits of up to Rs 1 lakh per financial year, it said.
 
Banks need to reconfirm KYC details only in every 2, 8 or 10 years depending on the risk profile, it added.
 
For KYC norms, one "proof of identity" and "proof of address" and a recent photograph are enough to open a bank account, RBI stated.
 
The Aadhaar card, a driving license, voters' identity card, passport or National Rural Employment Guarantee Act (NREGA) card serves as both proof of identity and proof of address while PAN card serves only as proof of identity, the apex bank clarified.
 
For any grievances about the KYC process, a person can complain to the bank and if unsatisfied with the response, can directly complain to the RBI's Banking Ombudsman, the notification said.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

 

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Patel's 'handover' at RBI is low key, unlike other governors
In keeping with the low-key style he is known for, Reserve Bank of India's new Governor Urjit Patel began his first working day on Tuesday away from media spotlights, unlike the practice followed by RBI governors in the past. There were no milling photographers at the "handover".
 
Patel had officially assumed charge on Sunday when the term of his predecessor Raghuram Rajan expired. Monday was a holiday here on account of the Ganesh Chaturthi, which kicked off the 10-day Ganesh festival.
 
An RBI spokesperson said photographs of the official ceremony of Patel assuming office would be released later on Tuesday.
 
Patel has taken over the bank's charge from Rajan after serving as RBI Deputy Governor since January 2013.
 
He has also worked at the International Monetary Fund (IMF), and was a consultant to the Union Finance Ministry from 1998 to 2001.
 
The RBI said Patel has a Ph.D. in Economics from Yale University, an M.Phil. from the University of Oxford and a B.Sc. from the University of London.
 
Following his departure from the RBI, Rajan on Monday cautioned governments and central bankers across the world against relying too much on low interest rates to propel growth or use it as a substitute for undertaking key structural reforms in the economy.
 
He told the New York Times in an interview that lower policy rates are often an easy solution. However, these can trap economies in a fear of psychosis that when they normalise the rates eventually could hurt growth and distort markets, thereby making a low interest rate policy difficult to abandon.
 
When Rajan took charge at the RBI in 2013, at a time the US Federal Reserve had declared its intent to wind down its stimulus programme, the rupee plunged in value in respect of the US dollar on fears about a spiralling current account deficit.
 
In a series of measures, Rajan managed to stabilise the currency that also brought back investors to the country. 
 
"Rajan's disciplined and focussed approach in leading the Reserve Bank during his first year as governor was remarkably impressive," British magazine Central Banking said while awarding Rajan its 'Central Banker of the Year' award for 2015.
 
Predicting the 2008 financial meltdown that is still affecting global economy, Rajan in 2005 argued that increasingly complex markets with myriad instruments of credit and mortgage-backed securities in ever greater quantities made the global financial system a risky place.
 
Almost a decade down the line, Rajan is stronger in his belief that global markets now are at the risk of a crash due to the competitive loose monetary policies being adopted by developed economies.
 
Pointing to the very low interest rate policies of the US Federal Reserve, the Bank of Japan and the Bank of England in a bid to stimulate their economies, Rajan has been warning that emerging markets are especially vulnerable to big shifts in capital flows triggered by the unprecedented monetary accommodation in rich countries.
 
The elevation of Urjit Patel as Governor has naturally raised expectation among those who were critical of Rajan for not easing enough the monetary policy by cutting rates.
 
When talking about the challenges for Patel as the Governor, it should also be kept in mind that his moorings are as monetarist as his predecessor Rajan's were, and he is considered to attach the same importance to inflation control as did Rajan.
 
His views on monetary policy were expressed at the time Rajan held rates in the February 2015 review after making an unexpected rate cut a month edarlier -- the first in nearly two years.
 
Patel at the time elaborated on the "important backdrop" to Rajan's move to hold rates.
 
"We are in the midst of the age of competitive depreciation and of a beggar-my-neighbour philosophy. It brings to mind an old African saying that when elephants fight, the grass suffers," Patel said at a press conference to announce the policy review, on the trend of accommodative monetary policies being adopted by developed economies.
 
"While the ECB (European Central Bank) and the Bank of Japan are printing money and devaluing their currencies on one hand, the US economy is reviving on the other. Anyone in the middle is getting crushed," he pointed out.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
  

 

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