The Reserve Bank of India on Thursday expanded the market for banks’ stressed assets by permitting them to be sold to other lenders, including non-banking financial companies and financial institutions.
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The RBI issued guidelines or framework for the banks to sell their NPAs not only to SCs (securitisation companies) or RCs (reconstruction companies), but also to other banks, NBFCs (Non-Banking Financial Companies) and financial institutions.
“Banks must provide adequate time for due diligence by prospective buyers which may vary as per the size of the assets, with a floor of two weeks at least to respond to the auctions”, said the central bank. In any case, participation of more buyers will result in better price discovery. But, instead of leaving it to bank boards to decide on the valuation framework, the regulator could specify the standard policy for asset sale.
Lenders have been asked to set up a board for early recognition and sale of assets, which must conduct periodic review at least once a year, and the board needs to be involved in the entire sale process, RBI said.
The head of banking and finance practice with an global advisory firm said while the intent was good, it was more an effort to regularise the process by specifying rules for asset sale.
To make the process more transparent, the RBI has guided that the discount rate used in the valuation exercise will have to be spelt out in the policy. This may be either cost of equity or the average cost of funds or opportunity cost or some other relevant rate, subject to a floor of the contracted interest rate and penalty. The policy has to cover the financial assets to be sold; norms and procedures for sale; valuation procedures to be followed to ensure that the realisable value of financial assets is reasonably estimated; besides delegation of powers of various functionaries for taking decision on the sale.
“It must be clearly specified as to in which cases internal valuation would be accepted and where external valuation would be needed”.
Further, banks should put in place board approved policy on adoption of Swiss Challenge Method for sale of their stressed assets to SCs/RCs/other banks/NBFCs/FIs. “However, in case of exposures beyond Rs 50 crore, banks shall obtain two external valuation reports”, it added. That means provisioning requirements will go up.
The cost of valuation has to be borne by the banks.
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So far, many banks were selling off bad loans to the ARCs and then investing into the security receipts issued by the ARCS on the same loans. The recent guidelines say that banks must reduce the share of SRs backed by their own assets to 10% of the total SRs held by April 2018, provisioning for anything higher.
