Wednesday, November 6, 2013

Banks Book Profit By Selling Bad Debts

It is really a mystery that  public sector banks are earning profit by selling their bad assets.A few banks have shown increased profit during last quarters just by selling their bad assets and that too at highly discounted rate.

 

Can anyone enlighten the hidden fact behind such story?


Second pertinent question is _______Is it morally religious to sell the asset at highly discounted rate? 

After all it is public money-------how bank is exonerated for lending to bad borrower, then for not recovering from bad borrowers and finally for selling the public property at half or lesser rate?

First corrupt officers earn in sanction of loan, then in exempting bad borrowers from punitive action and finally earning in sell such bad loan to ARCs called as Asset Reconstruction Companies.

Is there any mechanism to justify the value of selling such bad assets to ARCs?  


Is there any transparent auction process to stop corruption and finally loss to bank staff, investors,and public money.?


There are hardly two or three ARC functional in the country and hence there is all possibility of fixing the price while buying bad loan of any bank.Who will take care of such fraudulent game?

Given below is how bank and ARC play foul game with public money

Suppose a loan of Rs.500 crore given by a Bank ‘ B’ to a Company ‘C’ is treated as Non Performing Assets as on 31.03.2009. Bank stops charging interest on such NPA account as per RBI norms for income recognition. Let us suppose that bank has a prime security of say Rs.500 crores in form of goods, books debts  and plant and machinery and collateral security of say Rs.200 crores in form of landed property or some shares or LIC policies or some other plant and machinery.

Bank makes effort for recovery of loan but fail even after lapse of four years.
As on 31.03.2013 Books of bank accounts shows a debit balance of Rs.500 crore and interest accrued on this for four years is roughly Rs.250 crore. Altogether there bank has to recover Rs.750 crore from the company besides other expenses incurred in legal course of action and manpower lost in this process.

Bank decides to sell this loan to ARC at a discounted price of say  Rs.250 crore in lieu of bad loan and it is mutually agreed upon that the ARC will pay fifty percent of settled amount ( Rs.125 crore ) immediately and rest 50 percent (Rs.125 crore ) in next six years. If we take the net present value of entire recovery it will come to Rs.200 crores.

In books of account bank had to make provision of Rs.500 crores as on 31.03.2013 as because the account is treated as Bad and hence hundred percent provisions are needed. Here it is assumed that bad account is older than 3 years and hence 100% provision is done by the bank. Now in September 2013 the account is sold to ARC and hence bank decides to write off the said loan account from books of account.

In this way bank gets following benefits--
  • Volume of NPA is reduced by Rs.500 crore and hence Gross NPA ratio comes down
  • Bank get Rs.125 crore by ARC instantly which is treated as Non interest income by the bank and which helps bank in inflating profit.
  • Share value of the bank in the market goes up
  • But if we look at the above picture bank incurs a net loss of Rs.550 crore (Rs.750 -Rs.200 crores = Rs.550 crore) which is indirectly loss of public money which is bank’s nomenclature called as deposit received from public.

In this way bank claims that it has earned profit whereas it actually scarified Rs.550 crore to make it balance sheet attractive. Though bank gets success in manipulating and fraudulently presenting a rosy picture of the bank’s profitability, bank inculcate a wrong culture of making bad advances and then writing off the same or sacrificing a major portion of the same and thus causing huge loss to public and loss to staff who are unjustifiably denied respectful wage revision.

Here the million dollar question is “When ARC can recover the dues from such bad borrower, why not a state run bank can recover the same?”. After all ARC does not buy any bad loan for incurring a loss but to earn profit only. It is painful and astonishing that ARC gets success in getting favour from same state government and central government and same legal system which in turn help ARC in recovery of dues from recalcitrant and willful defaulter of the bank and which bank failed to recover.

It is worthwhile to mention here that due to casual, ill-motivated, biased and indifferent attitude of top officials of the bank, administrative officials of state machinery and biased and ill-motivated advices of politicians bank has to book loss on each high value bad loans whereas under the same environment is ARC which earn a profit of Rs.550 crore by selling the prime and collateral security of the borrower.

Lastly if taxpayers fail to or willfully avoid payment of Income tax or Service tax, will the government sell their dues to similarly branded ARCs?
Is it not shameful that government will all power invested in it find it impossible to recover the dues form big defaulters but get success in recovering the dues from person like Arvind Kejriwal or Ramdeo or any opponent of Congress Party?

Had the government run banks could entire dues from defaulters, profit of each bank could have been much more than what they booked in the past and they could have enhanced capacity to give higher wage hike to their staff and higher amount of bonus to staff to rejuvenate and to further boost up the morale of bank staff to work more vigorously for their bank


5 banks put Rs 6,700 cr bad loans on 


the block


The season of bad loan sales has begun. Banks are putting their non-performing assets (NPAs) on the block to clean up their books and book profit from it. Five state-owned banks together have already put Rs 6,700 crore of NPAs on the block for companies in the business of accumulating distressed assets —called asset reconstruction companies (ARCs) — to buy.

It is expected that many more bad loans would be up for sale. The assets are generally bought by ARCs at a discount. Selling the bad loans helps banks clean up their balance sheets. Since these NPAs are fully provided for, the money from the sale goes directly into banks’ profit and loss accounts.

SBI is showcasing about Rs 2,700 crore of bad loans to ARCs. However, it has not sold any as the process has just been initiated. Bank of India and Allahabad Bank have already sold loans worth Rs 1,102 crore. Others like Uco Bank, PNB, Bank of Baroda and Union Bank have identified about Rs 2,000 crore of loans to be sold.

Soundara Kumar, deputy MD of SBI, said the majority of his bank’s NPAs are SME loans and small corporate loans.

Last financial year, SBI did not put up any loan for sale. “This year we have initiated the process and will take a call, depending on the bids we receive,” he said.

Usually, loan sales happen in the third and fourth quarters. But this time they have begun in the second quarter itself; this is so that banks do not have to offer steep discounts to ARCs.

Shubhalakshmi Panse, CMD of Allahabad Bank, said, “We have sold Rs 732 crore loans of large and mid-corporate companies. We have received Rs 350 crore and the remaining will be paid in the form of security receipts. ARCs will have to make the payments on these receipts in six years.” The bank gave a 50 per cent discount on its loans. Allahabad Bank has identified another Rs 500 worth of loans to be sold in third quarter.

Vijayalakshmi Iyer, CMD of Bank of India, said, “We sold Rs 370 crore of bad assets and made a profit of Rs 8 crore.” Another Rs 500 crore worth of bad loans would be shed if the price is good and discounts are reasonable.

P Rudran, CEO and MD of Asset Reconstruction Company (India) said, “We have acquired some loan assets from banks. We are careful in selecting accounts with good underlying assets so that it is easy for us to get back the loans. This time, we have acquired SME loans and mid-corporate loans.”

Public sector banks willing to sell assets to ARCs: Prateek Agarwal, ASK Investment Manager

n a chat with ET Now, Prateek Agarwal, CIO, ASK Investment Manager, shares his views on the banking sector. Excerpts: 

ET Now: Do you think PNB could scale up their performance, especially in terms of asset quality? 

Prateek Agarwal: Public sector banks are willing to sell assets to ARCs; it has a benefit while it recognises that the assets are stressed. If they keep it on their balance sheets, the market starts to look at the provisioning done for those assets; the total gross NPA accretion and the concern is so high that the stock gets beaten down much more. 

However, if you off-loaded to an ARC, then it pays a value which is significantly higher than what market tends to believe the asset has. 

Thus, if you sell to an ARC, the amount of stressed asset on your books reduces, the NPA accretion reduces and your provisioning requirement also reduces. 

Overall, you gain on those numbers and that is the highest focus area of the market at this point. 

Public sector banks are a trade between 0.5 price to book and 0.8 price to book. A lot of those banks were trading closer to 0.5; now they are closer to 0.7 price to book already. Hence, the ability to go up further from where they are is very limited. Add to that, the environment stays stressed or would stay difficult for some time in future.
http://economictimes.indiatimes.com/markets/stocks/views/recommendations/public-sector-banks-willing-to-sell-assets-to-arcs-prateek-agarwal-ask-investment-manager/articleshow/25308978.cms


           ASSET RECONSTRUCTION COMPANY LIMITED-By Rajesh Goyal


The word asset reconstruction company is a typical used in India.  Globally  the equivalent phrase used is " asset management companies". The word "asset reconstruction" in India were used in Narsimham I report where it was envisaged for  the setting up of a central Asset Reconstruction Fund with money contributed by the Central Government, which was to be used by banks to shore up their balance sheets to clean up their non-performing loans.   However, this never saw the light of the day and later on  Narsimham II floated the idea  asset reconstruction companies..

Why ARC :
In last 15 years or so the number of economies around the world has witnessed the problem of non performing assets.    A high level of NPAs in the banking system can severely affect the economy in many ways. The high level of NPAs leads to diversion of banking resources towards resolution of these problems.  This causes an opportunity loss for more productive use of resources.  The banks tend to become risk averse in making new loans, particularly to small and medium sized companies. Thus, large scale NPAs when left unattended, cause continued economic and financial degradation of the country.  The realization of these problems has lead to greater attention to resolve the NPAs.  ARCs have been used world-wide, particularly in Asia, to resolve bad-loan problems. However, these had a varying degree of success in different countries.   ARCs focus on NPAs and allows the banking system  to act as "clean bank".

ARC in India :

In India the problem of recovery from NPAs was recognized in 1997 by Government of India.  The Narasimhan Committee Report mentioned that an important aspect of the continuing reform process was to reduce the high level of NPAs as a means of banking sector reform.  It was expected that with a combination of policy and institutional development, new NPAs in future could be lower.  However, the huge backlog of existing NPAs continued to hound the banking sector.  It impinged severely on banks performance and their profitability. The Report envisaged creation of an  "Asset Recovery Fund" to take the NPAs off the lender's books at a discount.

Accordingly, Asset Reconstruction Company (Securitization Company / Reconstruction Company) is a company registered under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act, 2002. It is regulated by Reserve Bank of India as an Non Banking Financial Company ( u/s 45I ( f ) (iii) of RBI Act, 1934).
RBI has exempted ARCs from the compliances under section 45-IA, 45-IB and 45-IC of the Reserve Bank Act, 1934. ARC functions like an AMC within the guidelines issued by RBI.

ARC has been set up to provide a focused approach to Non-Performing Loans resolution issue by:-
(a) isolating Non Performing Loans (NPLs) from the Financial System (FS), 
(b) freeing the financial system to focus on their core activities and 
(c) Facilitating development of market for distressed assets.

Functions of ARC :

As per RBI Notification No. DNBS.2/CGM(CSM)-2003, dated April 23, 2003, ARC performs the following functions :-
(i) Acquisition of financial assets (as defined u/s 2(L) of SRFAESI Act, 2002) 
(ii) Change or takeover of Management / Sale or Lease of Business of the Borrower 
(iii) Rescheduling of Debts 
(iv) Enforcement of Security Interest (as per section 13(4) of SRFAESI Act, 2002) 
(v) Settlement of dues payable by the borrower

How Does ARC actually Works :

ARC functions more or less like a Mutual Fund. It transfers the acquired assets to one or more trusts (set up u/s 7(1) and 7(2) of SRFAESI Act, 2002) at the price at which the financial assets were acquired from the originator (Banks/FIs).
Then, the trusts issues Security Receipts to Qualified Institutional Buyers [as defined u/s 2(u) of SRFAESI Act, 2002]. The trusteeship of such trusts shall vest with the ARC. ARC will get only management fee from the trusts. Any upside in between acquired price and realized price will be shared with the beneficiary of the trusts (Banks/FIs) and ARC. Any downside in between acquired price and realized price will be borne by the beneficiary of the trusts (Banks/FIs).

What is ARCIL?

ARCIL is the first asset reconstruction company (ARC) in the country to commence the business of resolution of non-performing loans (NPLs) acquired from Indian banks and financial institutions. It commenced business consequent to the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Securitisation Act, 2002). As the first ARC, Arcil played a pioneering role in setting standards for the industry in India. It has been spearheading the driveto recreate value out of NPLs and in doing so, it continues to play a proactive role in reenergizing the Indian industry through critical times




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