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

3 months 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

3 months ago

Match fix nahi ho raha Mahesh

Gupta

3 months ago

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

Gupta

3 months 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.

Tsunami drill begins in India, other Indian Ocean nations
A major Indian Ocean-wide tsunami mock drill involving India and 23 other Indian Ocean countries began on Wednesday to test warning and detection systems.
 
A tsunami warning was simulated with an earthquake of magnitude 9.2 south of Sumatra, Indonesia in the eastern Indian Ocean at 8.30 a.m.
 
The exercise involves evacuation of around 35,000 people from the coastal regions of India. The evacuation is being taken up in Andaman and Nicobar Islands, Odisha, Andhra Pradesh, Tamil Nadu, West Bengal, Kerala, Gujarat and Goa.
 
Authorities in Andhra Pradesh have selected a village each in nine coastal districts for evacuation as part of the exercise to check the preparedness.
 
The end-to-end warning systems -- from tsunami detection and forecast, threat evaluation and alert formulation, dissemination to public and their awareness and responses -- would be put to test during the mock drill, officials said.
 
Named 'IOWave16', the two-day mock drill is being organised by the Intergovernmental Oceanographic Commission (IOC) of the UNESCO, which coordinated the setting up of Indian Ocean Tsunami Warning and Mitigation System (IOTWMS) in the aftermath of the December 26, 2004 tsunami.
 
The major objectives of IOWave16 include testing the efficiency of communication links, disaster management offices and local communities at risk.
 
The Indian Tsunami Early Warning Centre (ITEWC), based out of the Indian National Centre for Ocean Information Services (INCOIS) here is capable of detecting tsunamigenic earthquakes within 10 minutes of their occurrence and issue timely advisories to disaster management officials as well as to the vulnerable communities.
 
On the second day of the two-day exercise on Thursday, agencies involved will simulate a magnitude 9.0 earthquake in the Makran Trench, south of Iran and Pakistan, in the northwestern Indian Ocean.
 
More than 2,00,000 people were killed in Dec 26, 2004 tsunami, which was triggered by an undersea earthquake off Sumatra, Indonesia.
 
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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COMMENTS

Bapoo Malcolm

3 months ago

When do we have one in Mumbai? It's got tons of low lying areas and will wash from west to east coast.

Sink or swim, return investors' money, SC tells Supertech
In an unambiguous message, the Supreme Court on Tuesday told real estate giant Supertech to return flat buyers' money, brushing aside its plea of financial constraints and the prospects of its sinking.
 
"Either you sink or die, we are not concerned. You will have to pay back the money to home buyers. We are least bothered about the financial status," the bench of Justice Dipak Misra and Justice Adarsh Kumar Goel told the firm.
 
The court's stern message came as senior counsel Rajeev Dhavan, appearing for it, told the bench that the builder did not have funds as money invested by the flat buyers has been spent in the construction of the building towers. He tried to draw a distinction with another real estate giant Unitech saying that later did not have a building whereas Supertech had them.
 
Telling the court that it could not act as a banker, Dhavan said that not all the flat buyers were against the real estate builder, pointing out that some of them have filed the plea challenging the Allahabad High Court's 2014 order directing demolition of two building towers.
 
The Allahabad High Court had on April 11, 2014 ordered the demolition, coupled with direction that flat buyers money should be returned with 14 per cent interest in three months' time.
 
The top court had on May 5, 2014, ordered status quo thereby putting on hold the demolition.
 
The bench was Tuesday informed that of 628 flat buyers, 274 have sought alternate arrangements, 74 have sought re-investment and 108 have sought refund of their money.
 
Directing the Supertech to return 17 flat buyers money in four weeks' time, the bench asked PSU National Building Construction Corporation to submit its inspection report by October 25.
 
The top court had on July 27 asked the NBCC to examine whether the distance between two disputed 40-storey buildings towers at Supertech's Emerald Court Complex in Greater Noida was in accordance with building regulations.
 
The court had on July 19 ordered the realty major to deposited Rs 5 crore with the court's registry, which it has complied with. 
 
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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COMMENTS

k.mohanarangam k.mohanarangam

3 months ago

thanks moneylife for the information with a request to
apprise ofrany legal position
with regard to m/s.Unitech ltd.

Growth Idea Lab

3 months ago

i think any solution which allows resolution shall be welcomed.as we are in complex situation with legacy,findind solution may not be easy.but rbi is giving enough indications to correct the situation

as i am representing msme,because our loan/unit is small and the mass is absolutely heterogineus it is not possible to give better solution then guidelines given by rbi in march.but to my knowldge no bank has implemented at branch levels.banks are not taking rbi seriously.apart from correption,cvc,cbi is also worriing branch people so the matter do not get reloved

Shyamsunder Nambiar

3 months ago

Salutations ,Kudos to the Judges of The Supreme Court for this courageous and Bold decision. Respected Supreme Court Judges - You are the Only Hope for the Citizens of India. The Respected judges have put the Fear of Law into these unscrupulous Builders who till now were thinking that India is a lawless country... thanks to the Thareek pe Thareek adjournments which go for years and decades...Prevention is better than Cure for this country wide spread disease - called cheating the innocent and gullible Home Buyers of their hard earned money by the Unscrupulous Builders. We need an urgent and important judgment from the Supreme Court to immediately stop Builders from selling Flats in under construction projects. Builders who have sold Flats and not given possession for more than 5 yrs should be made to refund the money paid plus compensation equivalent to an amount to enable the cheated Customers to buy a ready to move-in house in the same area.While there are few Good Developers who care for customers, there are Hundreds of Builders (some erstwhile big names who now have a sullied reputation, included) who are openly cheating gullible and innocents customers. As the recent judgments from the Supreme Courts to the High Courts and Consumers Courts are now increasingly realizing the plights of the sufferings of Home Buyers and have become the saviors of the common man.The Bitter truth is that the Builders have taken money from Customers and instead of using that money for constructing the Flats the purpose for which customers have paid, they have diverted that money- partly to purchase other properties, partly to their personal accounts to fund their lavish lifestyle, as the Mumbai High Court mentioned...partly siphoned out funds.. and is left with nothing to pay the contractors and the suppliers to construct the Customer's Flat. The lame excuse given to customers is that the Govt does not give approvals. The Big question then is why did you sell making false promises and you still continue to sell. When they have not delivered to Customers who have booked 5 yrs or even more than 10 years back, it is so obvious that some of these unscrupulous Builders are indulging in a criminal act of Conspiracy to Cheat the gullible customers and are Wealth Stealers. Charge them under Section 420 of the Indian Penal Code. Put them in Jail, behind the bars like the Supreme Court did with the Sahara Chief. All the Customers money that was siphoned out of the company into personal accounts will come back from wherever it is stored. The Courts should not accept this fraudulent statements - that the Builders cannot refund the Customers own hard earned money. Don't underestimate the Indian Judiciary. Don't underestimate our Esteemed Supreme Court. Respect the Customers who provide the next meal to you and your family. Learn to be Grateful to Customers. Customer is the King. Customer is God. GOD BLESS ALL OF US ..INCLUDING THE UNSCRUPULOUS BUILDERS. GET WELL SOON

Param

3 months ago

maybe they can get the money back from the govt officials they bribed to create this mess in the first place...

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