The Telegraph
Friday , June 27 , 2014
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Bad asset sale under scanner

Npa worry

Mumbai, June 26: The Reserve Bank of India today called for a closer look into the sale of non-performing assets (NPAs) by banks to asset reconstruction companies.

The sale of NPAs to asset reconstruction companies (ARCs) has shown a rise, particularly after December 31, 2013. This has contributed to the improvement in banks’ gross NPAs as a percentage of total advances as slippages (accretion of fresh bad loans) declined.

The State Bank of India had announced its plan to sell around Rs 4,000 crore of its bad loans to ARCs. Other nationalised banks are also following this route.

However, the RBI now wants to take a closer look at the process.

“As most of the securitisation activity is taking place predominantly with the issuance of securities receipts (SRs) rather than cash, there is a concern that banks may tend to use this option to evergreen their balance sheets,” the financial stability report released by the RBI said today.

A security receipt is issued by a securitisation or reconstruction company to any institutional buyer as an evidence that the holder has a right, title or interest in the financial asset involved in the securitisation.

On the other hand, securitisation is a process through which assets are packaged, converted into tradable securities and sold to third-party investors.

“Further, as the banking industry has a significant stake in the ownership of most of the ARCs currently functioning in India, the spread of risks may not be taking place effectively,” the report added.