Mumbai: Several large public sector banks have sold their bad loans to asset reconstruction companies (ARCs), but State Bank of India (SBI), the largest of them all, would rather settle them in the bankruptcy court. SBI, the lead bank in a majority of big cases referred to insolvency courts, is of the view that the resolution process at the National Company Law Tribunal (NCLT) will fetch a better valuation for these assets.

“We are not looking to sell assets which are under NCLT to ARCs outside the resolution process," SBI chairman Rajnish Kumar said. Earlier this month, Union Bank of India and Bank of Baroda (BoB) put up about Rs16,270 crore worth of loans, including those of Bhushan Steel Ltd and Essar Steel Ltd, for sale to ARCs. Both steel companies are in the Reserve Bank of India’s first list of 12 cases undergoing insolvency proceedings. In December, BoB had also sold its foreign currency loan exposure in Essar Steel to foreign funds.  

Recently, Indian Overseas Bank too 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. Union Bank and BoB spokespersons did not respond to emails seeking comment.

According to an SBI official, who spoke on condition of anonymity, the bank is also worried about the consequences of a change in composition of committee of creditors following the loan sale. When an ARC buys a troubled company’s debt from various lenders, its representation goes up in the creditors’ committee. SBI, this official said, believes this could lead to differences of opinion on issues such as interim financing, and make it difficult to get three-fourth of the lenders to agree to any resolution plan, as required under IBC.

“ARCs per se coming in as a part of committee or creditors will not be a challenge. But if their assumption is different from that of a lender, then there could be hiccups in the resolution process. Also, unlike banks, ARCs don’t have to make provisions against the asset identified by the RBI for IBC process," said Udit Kariwala, senior analyst, India Ratings and Research. 

“The IBC process ensures preservation of assets. By selling loans to ARC, banks are only looking at short-term profitability," the SBI official cited earlier said. “But most deals happen under the 15:85 rule, where very little cash is paid upfront and banks have to provide for security receipts. So, where is the profit?" he asked.

Under the 15:85 rule, ARCs are required to pay banks minimum 15% of the sale value of the asset upfront, while issuing security receipts for the remaining amount. According to the same official, in the case of Jai Balaji Industries, banks like Allahabad Bank and UCO Bank sold their exposure to ARCs at a discount of 63%. The deal happened under the 15:85 rule, where the ARCs gave only 15% of the net asset value as upfront cash and issued security receipts for the rest.

Many banks want to sell their bad loans to ARCs to clean up their books and avoid prompt corrective action (PCA) being invoked by the Reserve Bank of India against them. 

“31st March is a crucial deadline for us. We have to sell some of these assets if we have to avoid potential PCA by the RBI," said a senior bank official at Union Bank of India. Under RBI’s new PCA framework, breaching a net non-performing assets (NPA) ratio of 6% invites action, including limits on lending and expansion. 

At least half of the state-owned banks including Bank of India, Central Bank of India and Indian Overseas Bank are currently under PCA. 

As on 30 September, Union Bank of India reported a net NPA ratio of 6.70%, while Bank of Baroda’s net NPA stood at 5.05%. 

Banks which have put these assets on sale, however, are looking at a full exit from these accounts, preferring all-cash deals. “One of the reasons why we do this is to get what we are intending to get. Second, we would be selling these to the maximum extent possible on cash terms. Third, it will release some blocked funds so that we can release and recycle them. The ARC will step into our shoes and then, as far as we are concerned, we are out," said senior banker of a leading public sector bank when asked about SBI being concerned about the sale of loans.