Even as the State Bank of India and other public sector banks prepare kick-starting a bad bank, the recovery and resolution record of the largest bank in the country under the private asset reconstruction companies (ARCs) model is not very inspiring.
In the last five years, the SBI has parted with its bad loans at a heavy discount of 70 percent to the loan outstanding to private ARCs. The bank, however, has got only 30 paise to a rupee outstanding. In terms of the book value of assets, the bank’s realisation was less than 40 paise to a rupee.
In absolute terms, the bank sold its bad loans for Rs 8,000 crore against the loan outstanding of Rs 30,000 crore plus. The realisation of 30-40 paise or Rs 8,000 crore is also not in upfront cash but paid via the security receipts (SRs), which the bank is still holding. In fact, the bank is forced to make almost 50 per cent provisions against these SRs because of lacklustre recovery.
SBI is holding SRs worth over Rs 7,000 crore issued almost 5 years ago. The current book value of SRs received by SBI for bad loans sold to ARCs is Rs 8,350 crore. The bank has also provided 50 percent provisions against these SRs for any diminution in its value.
The poor track record of ARCs in resolving bad loans is the reason for high provisions against SRs. The bank will have no option but to write off SRs after eight years. Under the current structure, ARCs buy bad loans from lenders or banks by paying 15 per cent upfront cash and balance 85 per cent in SRs. It keeps the bad assets in a trust and starts the process of resolution by way of restructuring, change of management, and recovery.
The trust generally has 5 to 8 years period to resolve the loan and pay back cash against the SRs issued to lenders. However, if the recovery doesn't happen, the bank has to make provisions from profits and later write off the entire SRs.
Most of the PSBs actually mirror the SBI's track record in selling bad loans to private ARCs. They are saddled with SRs with a holding period of more than 5 years with no recovery in sight.
The banks are now going slow in selling bad loans to private ARCs. In 2019-20, the amount recovered as per cent of the amount involved under the Insolvency and Bankruptcy Code (IBC) was 45.5 per cent, followed by 26.7 per cent for ARCs, according to RBI. "While the amount recovered through ARCs as per cent of amount involved was significantly higher in the initial years of their inception, in the recent years, it has dipped below 30 per cent except for a spurt in 2017-18," states the RBI report.
The new bad bank or PSB-backed NARCL is being set up to improve the realisation for the PSBs, but the challenges to resolve and restructure a bad loan remains as many of these assets have very little value left with large scale instances of fraud, unsustainable debt, and multiple litigations in the court.
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