Banks review sale of loans under resolution to ARCs
Mumbai: Banks are rethinking plans to sell bad loans under resolution in bankruptcy courts to asset reconstruction companies (ARCs), three bankers aware of the matter said, after State Bank of India and Indian Banks’ Association expressed their displeasure.
Union Bank of India and Bank of Baroda (BoB) are looking to sell their exposure in Bhushan Steel Ltd to SSG Capital owned Assets Care & Reconstruction Enterprise Ltd in an all-cash deal, Economic Times reported on 7 February.
According to a Union Bank official, one of the three bankers cited earlier, the bank is looking to sell nearly Rs2,700 crore of domestic exposure in Bhushan Steel and Essar Steel Ltd before March-end.
An IDBI Bank official, the second of the three bankers, said his bank was also looking to follow BoB’s example of selling their foreign exposure worth $300 million in Essar Steel to foreign funds.
Recently, Indian Overseas Bank too had sold its exposure of Rs1,600 crore in Essar Steel and Rs600 crore in Bhushan Steel to Edelweiss Asset Reconstruction Co. Ltd and Assets Care and Reconstruction Enterprise Ltd, respectively.
Both steel companies are in the Reserve Bank of India’s first list of 12 cases undergoing insolvency proceedings.
However, banks are reviewing sales of these loans, which they are planning to sell to ARCs, following the latest letter issued by the IBA.
“We believe that any proposal to sell bad loans undergoing insolvency proceedings should be collectively decided by the Joint Lenders’ Forum (JLF). Since the asset is admitted to the National Company Law Tribunal (NCLT), the matter is sub-judice. Hence, banks should avoid selling these assets as it would strengthen the ARCs’ position and disturb the resolution plan,” said Usha Ananthasubramanian, chairperson, IBA.
Emails sent to SBI, Union Bank and IDBI Bank were not answered till press time.
IBA’s concerns are also shared by the country’s largest lender SBI, the lead bank in many of the stressed cases undergoing insolvency proceedings. According to a Mint report dated 18 January, SBI has questioned these sale of loans to ARCs while the resolution process is underway. The bank fears such loan sales could result in a change in composition of the committee of creditors. When an ARC buys a troubled company’s debt from various lenders, its representation goes up in the creditors’ committee, thereby making it difficult to get three-fourth of the lenders to agree to any resolution plan, as required under IBC.
Separately, the finance ministry’s department of financial services has also informally expressed its displeasure over the sale of loans to ARCs, said one of the bankers cited earlier.
According to the Union Bank official cited above, the bank was looking to sell bad loans to ARCs to clean up books and avoid prompt corrective action (PCA) being invoked by the RBI against them.
Under the new PCA framework, breaching a net non-performing assets (NPA) ratio of 6% invites action, including limits on lending and expansion. “We don’t want to go against the JLF and independently sell these assets,” the official added.
Papia Sengupta, executive director, Bank of Baroda, on the other hand said that the bank will take a call on selling loans to ARCs depending on the pricing.
As on 30 December, Union Bank of India’s net NPA ratio as a percentage of total advances stood at 6.96%, Bank of Baroda at 4.97% and IDBI at 16.02%.