New Sarfaesi to break loan pricing deadlock

Published: Friday, Dec 14, 2012, 1:58 IST 
By Megha Mandavia & Aswathy Varughese | Place: Mumbai | Agency: DNA

Revival of financially sick businesses has just become easier. For, the long-standing deadlock between banks with bad loans to sell and asset reconstruction companies (ARCs) over pricing issues may end finally.

This week’s amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi) now allow ARCs to convert defaulting company’s debt into equity.

Asset Reconstruction Company (India) Ltd or Arcil, India’s biggest ARC, said it may now be able to offer better deals to banks for bad loans. 
R K Bansal (pictured), executive director of IDBI Bank, said other ARCs may follow suit. “They can now pay a better price to banks to buy ailing assets as they will now have more wherewithal to recover their dues.”
The ARC sector has been asset-starved for the past two years. Banks had been expecting higher prices for their bad loans than what ARCs were ready to offer. 
Arcil’s MD and CEO P Rudran said, “At the due diligence stage, we won’t decide on pricing. But, if we are able to assess the value (of the non-performing asset or bad loan concerned), then, perhaps, we would be able to pay a little more. We may reduce the discount. Revivals will focus onbusiness viability. We will help as per the requirements of the ailing company concerned. We will resell the stake the moment such a company recovers.”
But some doubt if everything would be hunky dory for ARCs now. P H Ravikumar, MD and CEO of Invent Assets Securitisation and Reconstruction, for one, said acquisition of bad loans from banks still remains a challenge. 
“More than the pricing issue, the deadlock lies in banks’ under-provisioning for bad loans. If a non-performing asset is under-provided, it will reflect in the price at which banks are willing to give ARCs the bad loans,” said Ravikumar. 
megha.mandavia@dnaindia.net , aswathy.rachel@dnaindia.net

http://www.dnaindia.com/money/report_new-sarfaesi-to-break-loan-pricing-deadlock_1777355

NPA recovery Bill won’t shake things up

Published: Friday, Dec 14, 2012, 2:08 IST 
By Megha Mandavia | Place: Mumbai | Agency: DNA

The pain of bad loans does not seem to be going away anytime soon. A new amendment passed by the Lok Sabha on Monday making auctioning of borrower security easier may not actually translate into any substantial or even immediate reduction in these loans for public sector banks.

The key provision in the new Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi) now allows banks to bid for the unrealised security against the value of non-performing assets (NPA) if it is unable to secure a decent value of the assets at the auction. This will help banks offset outstanding NPAs against the ‘realisation’ and sell them later at a better price.

“It certainly helps because many auctions don’t go through due to cartelisation by bidders and legal issues. But the impact will not be substantial on non-performing assets because every time we don’t have that much collateral to sell,” pointed out BA Prabhakar, chairman and managing director at Andhra Bank.

PSU banks are plagued by rising levels of non-performing assets with a slowing economy and loose lending norms. Gross NPA levels at all listed banks in the quarter ended September on an average stood close to 3%, which are expected to go up to as much as 4.5% in the next one year.

The recent changes will no doubt hasten the recovery process, but a substantial impact on bad loans will not be visible, bankers and analysts said. “We don’t see this as a material change – the difference is largely optical and it is likely that the market will see through these cosmetic accounting changes,” said Seshadri Sen, an analyst with JP Morgan. “Our negative view on PSU banks is underpinned by expectations of continued momentum in incremental delinquency, a view that remains unchanged.”

Large public sector banks are continuing to lend aggressively to stressed sectors such as real estate, iron and steel, textiles, infra and agriculture, thus increasing the risk factor in the banking system, even though bankers are tracking recoveries on a daily basis now.

“The amendment will definitely help increase recoveries, but won’t reduce the NPAs immediately. The change will happen only over a period of time. All these changes are just enablers which help us put more pressure on willful defaulters,” said RK Bansal, executive director with IDBI Bank.

http://www.dnaindia.com/money/report_npa-recovery-bill-wont-shake-things-up_1777362

Sarfaesi laws may lessen banks' bad loan burden

Avinash Celestine, ET Bureau Dec 23, 2011, 03.22am IST
 
NEW DELHI: Banks will be allowed to take property seized from defaulting borrowers onto their own books, or in effect 'buy' the asset they sequester, thus reducing their non-performing loans, according to a revised securitisation law awaiting parliamentary sanction.

In effect, this would allow banks to clean up their books but at the risk of being saddled with an asset worth far less than what the bank paid for it.

This change, which forms a part of the proposed amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi), introduced last week, comes at a time when banks face the risk of rising non-performing loans, and of being saddled with property seized from borrowers unable to pay back their loans.

Worse, a weak property market means that banks may be unable to find buyers for the property they have seized — at least at the price they want.

The same set of amendments also propose to give the finance ministry wide-ranging powers to notify certain types of banks to whom the provisions of Sarfaesi will not apply, or apply only with certain 'exceptions, modifications and adaptations'.

It also brings multi-state co-operative banks within the ambit of Sarfaesi and allows asset reconstruction companies (ARCs) to convert debt into equity as part of a restructuring. At present, Sarfaesi allows banks and ARCs to seize assets from loan defaulters, which in many cases include immoveable property. Banks then typically hold an auction to sell the property.

However, if a bank is unable to find buyers willing to bid above the reserve price, or the minimum bid amount, it currently has little option but to postpone the auction to a future date, and hope for a better bid.

Under the proposed changes, in case of a failed auction, the bank can depute one of its own officers to bid for the property at the reserve price at any future auction. If there are no other bidders yet again, or the bank's own bid is the highest, the property stands 'sold' to the bank. Under current law, a bank is not allowed to bid for property it puts up for auction.

"This is allowed under the Civil Procedure Code and the incometax recovery laws," said MR Umarji, chief advisor-legal, Indian Banks' Association. The changes also apply to ARCs.

Govt tables Amendment Bill to deal with recovery of bad loans

The government on Monday introduced an Amendment Bill in Parliament to enable banks and financial firms to effectively deal with the problem of bad loans.

The move could help bring down lending rates for home and corporate loans, experts said. Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, which was introduced by minister of state for finance Namo Narain Meena in the Lok Sabha, seeks to strengthen recovery process of secured loans.

It seeks to amend the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 and Recovery of Debts due to Banks and Financial Institutions (RDBF) Act 1993.

The amendment in SARFAESI Act will "provide for conversion of any part of the debt into shares of a borrower company and such conversion shall be deemed always to have been valid as if the provisions of said conversion were in force at all material times."

Besides, it seeks to bring multi-State cooperative banks under the category of the bank.

At the same time, it will enable to increase the period of response to be sent by the banks or financial institutions to the representation of the borrowers to 15 days from 7 days.

It will also empower banks or financial institutions to accept the immovable property in full or partial satisfaction of the claims of the bank against the defaulting borrower.

The amendment will allow district magistrate or the chief metropolitan magistrate to authorise any subordinate officer to take possession of assets or forward assets to the secured creditors.

The Bill has also proposed to amend the RDBF Act 1993 that among other things would "enable the banks and financial institutions to enter into settlement or compromise with the borrowers and also to empower
Debts Recovery Tribunals to pass an order acknowledging such settlement or compromise."

It also seeks "to permit the multi State Cooperative banks, with respect to debts due before or after the commencement of the proposed legislation, to opt either to initiate proceedings under the the Multi-State Co-operative Societies Act 2002 or to initiate proceedings before the Debt Recovery Tribunal."

To ensure expeditious adjudication and recovery of dues of banks and financial institutions, remove legal anomalies and strengthen the Recovery Tribunal, the RDBF Act was amended in the years 1995, 2000 and 2004, the Bill said.

"Once the Bill is cleared, procedural changes in loan recovery is expected to lower the cost of funds for borrowers," Ernst & Young partner Ashvin Parekh said, adding that risk premium on secured loans will soften.

Banks may be allowed to accept immovable property to settle claims

The Hindu - Business Line  New Delhi, Dec 12: 

Banks and financial institutions may soon be allowed to accept immovable property in full or partial satisfaction of claims against defaulting borrowers. A proposal to this effect has been made in a new Bill introduced in Lok Sabha on Monday to amend the existing Sarfaesi law.

Currently, banks are not empowered to accept immovable property in full or partial satisfaction of the claim against the defaulting borrower, if no bidder comes to bid or banks are unable to find a buyer for such assets. Banks, as secured creditors, are, however, permitted to sell the securities to realise the defaulted loans.

This Bill — The Enforcement of Security Interest and Recovery of Debt Laws (Amendment) Bill 2011 — was introduced by Mr Namo Narain Meena, Minister of State for Finance.

It provides for mandatory registration of all securitisation, reconstruction and creation of security interest transactions in the Central registry. All such transactions that are subsisting on or before the establishment of the Central registry will also have to be registered, the Bill has said.

The Bill would also enable securitisation firms to convert any part of debt into shares of the borrowing company. At present, reconstruction or securitisation firms cannot convert their debt into equity in cases of business reconstruction, rehabilitation or revival.

Another significant proposal relates to allowing multi-state co-operative banks to initiate proceedings through debt recovery tribunals (DRTs). Also, banks or any person will soon be empowered to file a caveat so that before granting any stay, they are heard by the DRT.

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (Sarfaesi) was enacted to regulate securitisation and reconstruction of financial assets and enforcement of security interest.