SBI sold bad debt at 70% off, recovery is still a long way off
Even though the State Bank of India and other public sector banks are gearing up for a bad bank start-up, the recovery and resolution record of the country’s largest bank modeled on the private asset rebuilding companies ( ARC) is not very inspiring.
Over the past five years, the SBI has parted with its bad debts at a steep 70% discount to the outstanding loans to private ARCs. The bank, however, only has 30 paise for a rupee in circulation. In terms of book value of assets, the bank’s realization was less than 40 paise to a rupee.
In absolute terms, the bank sold its bad debts for Rs 8,000 crore against the outstanding loan of Rs 30,000 crore plus. The realization of 30-40 paise or Rs 8,000 crore is also not in cash up front but paid via collateral receipts (SR), which the bank still holds. In fact, the bank is forced to set aside almost 50 percent of provisions against these SRs due to poor collection.
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SBI holds SRs worth over Rs 7,000 crore issued almost 5 years ago. The current book value of SRs received by SBI for bad debts sold to ARCs is Rs 8,350 crore. The bank also provided 50 percent provisions against these SRs for any decrease in its value.
The poor record of CRAs in resolving bad debts is the reason for the high provisions against SRs. The bank will have no choice but to cancel SRs after eight years. Under the current structure, ARCs buy bad loans from lenders or banks by paying 15% upfront in cash and the balance 85% in SR. He keeps the bad assets in a trust and begins the resolution process through restructuring, management change and turnaround.
The trust usually has a period of 5 to 8 years to resolve the loan and repay the SRs issued to the lenders in cash. However, if the recovery does not occur, the bank must set aside profit provisions and then write off all SRs.
Also read: Avoid Bad Debt Using NPA Parking with ARCs as an excuse: Parliament Panel to Banks
Most PSBs actually mirror the SBI’s track record in selling bad debt to private CRAs. They are grappling with SRs with a holding period of more than 5 years with no return in sight.
Banks are now slow to sell bad loans to private CRAs. In 2019-2020, the amount recovered as a percentage of the amount involved under the Insolvency and Bankruptcy Code (IBC) was 45.5%, followed by 26.7% for ARCs, according to RBI. “While the amount recovered through ARCs as a percentage of the amount involved was considerably higher in the early years of their inception, in recent years it has fallen below 30%, with the exception of a surge. in 2017-18, ”says the RBI report. .
The new bad bank or NARCL backed by PSBs is being put in place to improve the achievement of PSBs, but challenges to resolve and restructure bad credit remain as many of these assets have very little value with cases. large-scale fraud, unsustainable debts and multiple litigation before the courts.
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Also read: Rs 5.5 lakh cr of bad debt recovered through reforms such as IBC: Govt