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Business News/ Industry / SBI selling assets before they are ready to be classified as NPAs
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SBI selling assets before they are ready to be classified as NPAs

Loans where interest repayment is delayed by more than 60 days are being sold to asset reconstruction firms

On 31 March, the mid-corporate group of SBI was the largest contributor to bad loans, with `26,257 crore of NPAs, or 42% of its total gross NPAs of `61,605 crore. Photo: Pradeep Gaur/MintPremium
On 31 March, the mid-corporate group of SBI was the largest contributor to bad loans, with `26,257 crore of NPAs, or 42% of its total gross NPAs of `61,605 crore. Photo: Pradeep Gaur/Mint

Mumbai: In an attempt to improve asset quality and avoid future bad loans, State Bank of India (SBI) is selling stressed assets before they are ready to be classified as non-performing, a deputy managing director said in an interview.

In line with the revised guidelines of the Reserve Bank of India (RBI) on managing sticky assets, SBI, India’s largest lender, is selling loans where interest repayment is delayed by more than 60 days to asset reconstruction companies (ARCs).

Loan repayments that are more than 90 days overdue are classified as non-performing assets (NPAs) under existing regulations. RBI in February had issued guidelines that stressed the need for early detection of stress in loan assets and quick resolution of these cases.

The assets being sold are typically the ones where other options such as restructuring would not yield any result.

“We first look at recovery measures and then exercise other options including sale to ARCs," N.K. Chari, deputy managing director, mid-corporate group, SBI, said in a telephone interview on Friday.

On 31 March, the mid-corporate group of SBI was the largest contributor to bad loans, with 26,257 crore of NPAs, or 42% of its total gross NPAs of 61,605 crore.

The bank recovered loans worth 3,389 crore in the year ended March. While SBI upgraded loans worth 5,054 crore, the write-offs stood at 5,698 crore. In February, SBI had announced special steps to curb the rise in bad loans and deal with stressed assets early on.

One of the steps under this strategy was to rework the structure of the stressed asset management group (SAMG) of the bank by allowing it to deal with more NPAs and stressed accounts than before. The SAMG group of the bank manages large NPAs and works with recovering loans through either restructuring or asset sale.

Prior to the steps being announced, SAMG used to represent only 12% of the bank’s NPAs and would deal with cases only where recovery measures by the department concerned had been exhausted, Arundhati Bhattacharya, chairperson of the bank, had said while talking to reporters after announcing the bank’s October-December quarter results on 15 February 2014.

“At times we decide on selling the asset ourselves, we may also sometimes send it to the SAMG, which may then either recover the loan or sell it themselves," Chari said.

The bank also stepped up monitoring of stressed accounts and is working on resolving problem accounts before they turn bad. Usually ARCs pay up 5% of the decided price in cash and issue security receipts for the remaining amount, Chari said. “These receipts are usually redeemed in three-five years."

Once the asset is sold to ARCs, it is removed from the bank’s loan book and moved to its investment portfolio, due to the security receipts, he said.

Experts say this might be the beginning of a trend for more state-owned banks since the probability of recovery is higher when a loan is classified as a special mention account-2 (SMA-2), or where repayment is due for more than 60 days but less than 90 days, and sold before it actually turns bad.

“By the time an account is classified as an NPA, much of the value is lost. Earlier since only NPAs were allowed to be sold to ARCs, the only option they had was to auction the assets, also known as asset stripping. But with SMA-2 accounts, they can actually perform the function they were required to perform of reconstruction, where they take over the company and help it get back to its feet," said Abizer Diwanji, executive director, finance, at EY, a consulting firm earlier known as Ernst and Young.

Asset reconstruction companies though say an SMA-2 account does not make any material difference to recoveries.

“Usually a bank sells the asset to an ARC when it cannot recover anything from it. SMA-2 is merely a tag, the assets are usually those which are set to turn into NPAs soon. So the problems we face in recovery are still there," said V.P. Shetty, executive chairman at JM Financial Asset Reconstruction Co. Pvt. Ltd.

The new rules, which came into effect on 1 April, say lenders need to carve out a special category of assets termed special mention accounts in which early signs of stress are visible.

Accounts within this category will be put under three sub-categories—SMA, SMA-1 and SMA-2—based on the period for which their principal or interest payments are overdue. The duration of overdue payments can range from under 30 days to over 90 days. Loan repayments that are more than 90 days overdue are classified as NPAs.

Another trend that Diwanji of EY sees is of bank consortia selling an asset together to one ARC, like in the case of Hotel Leelaventure Ltd.

The consortium led by SBI had sold 97% of the total debt under corporate debt restructuring to JM Financial Asset Reconstruction. “This will give the ARC more power to revive the company since it has most of the loan amount under its control," Diwanji said.

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Published: 29 Jul 2014, 10:54 PM IST
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