Banks and financial institutions (FIs) put on the block NPAs worth Rs 12,200 crore (Rs 122 billion) in 2009-10, almost 2.5 times the Rs 5,019 crore (Rs 50.19 billion) put on the block in the year ended 2005, according to Asset Reconstruction Company India Ltd (Arcil).
Arcil, promoted by banks, has close to 80 per cent market share in NPAs bought from financial sector players (banks and FIs). At present, the Reserve Bank of India has permitted 13 asset reconstruction company (ARCs), including Arcil, to get into the business of buying and restructuring bad loans.
Yet, the amount of NPAs sold is just a small part of what banks can possibly offload to clean up balance sheets. Outstanding gross NPAs of 39 listed banks were Rs 70,781 crore at the end of December 2009, up from Rs 55,280 crore a year ago, according to Capital Market's online data.
Neeta Mukerji, president and chief operating officer with Arcil, said the government and regulator should incentivise banks to sell NPAs. When the environment becomes more conducive, banks would feel the need to exit from NPAs.
Securitisation of non-performing loans (NPLs) has picked up over the last few years. ARCs typically buy non-performing assets from banks. To hold these assets, they establish a trust, which subsequently issues Security Receipts (SRs). Since the ratings assigned to SRs are "private ratings", reliable data on deal volume is usually not available.
Rating agency Icra expects an increase in the transfer of NPLs to ARCs, given the stressed economic environment, and the resultant rise in NPAs. However, significant restructuring of accounts done by banks led to lower-than-expected reported NPAs.
Bankers apprehend that some portion of the assets restructured under RBI's special dispensation after the financial crisis (when restructured loans were allowed to be not classified as NPAs, for a year till last June) continue to be vulnerable. The financial health and repayment capacity of such units are still in question.
Yet, banks are not coming to the market to offload bad loans for reasons like increase in their holding capacity. Offloading such loans also means having to take a higher hair-cut (loss) on the assets, according to S Bhojani, partner at legal firm Amarchand Mangaldas.
Further, there is usually a wide mismatch in price expectations between the buyer and seller of NPLs, another hindrance to growth of transactions in this segment.