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Even if the State Bank of India and other public sector banks are preparing for a bad bank kickstart, the record of recovery and resolution of the country’s largest bank under the Private Asset Reconstruction Company (ARC) model is less stimulating. Not the target.
Over the last five years, SBI has given up bad debts at a significant 70% discount on loans unpaid to private ARC. However, the bank only has 30 paisa for unpaid rupees. In terms of book value of assets, the bank’s realization was less than 40 Paisa against the rupee.
Absolutely, the bank sold 8,000 rupees of bad debt for an unpaid loan of over 30,000 rupees. Realization of 30-40 Paisa or Rs 8,000 is also not prepaid and is paid through the securities receipt (SR) still held by the bank. In fact, banks have been forced to make a near 50% reserve for these SRs due to the delay in recovery.
Also read: SBI Card Q1 Results: As bad debts increase, net income will decrease by 22% to SEK 305.
SBI owns over 7,000 rupees of SR issued almost five years ago. The current book value of SR received by SBI for non-performing loans sold to ARC is Rs 8,350. Banks also provide a 50% allowance for these SRs for their depreciation.
ARC’s inadequate track record in resolving non-performing loans is the reason for its high provision for SR. Banks have no choice but to amortize SR after eight years. In the current structure, ARC purchases bad debts from lenders or banks by paying a 15% down payment and the remaining 85% in SR. Trust bad assets and start resolution processes such as restructuring, management changes, and recovery.
Trusts typically have a period of 5 to 8 years to settle a loan and repay cash against an SR issued to a lender. However, if there is no recovery, the bank will have to make a provision from the profit and later amortize the entire SR.
Also read: Avoid window dressing of bad debts by parking NPA at ARC: Parliamentary panel to banks
Most PSBs actually reflect SBI’s track record in selling non-performing loans to private ARC. They have SR with a retention period of 5 years or more and no recovery has been seen.
Banks are currently lagging behind in selling non-performing loans to private ARC. According to the RBI, in 2019-20, the amount recovered as a percentage of the amount under the Bankruptcy and Bankruptcy Act (IBC) was 45.5%, followed by 26.7% for ARC. “The amount collected through ARC as a percentage of the amount involved was significantly higher at the beginning, but in recent years has fallen below 30%, excluding the 2017-18 surge,” the RBI report said. Says. ..
New bad banks or PSB-backed NARCL have been set up to improve the realization of PSB, but many of these assets are unsustainable due to large-scale fraud cases. , The challenge of resolving and restructuring bad debts remains. Debt, and multiple proceedings in court.
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