Even as the State Bank of India (SBI) and other public sector banks prepare to launch a bad bank, the largest bank in the country's recovery and resolution performance under the private asset reconstruction companies (ARCs) model is not very encouraging.
In the previous five years, the SBI has sold off its poor loans at a 70 percent discount to the amount owed to private ARCs. The bank, on the other hand, only has 30 paise to a rupee in circulation. The bank's realization was less than 40 paise to a rupee in terms of the book value of assets. The bank liquidated its bad debts for Rs 8,000 crore in absolute terms, against a loan obligation of Rs 30,000 crore or more. The realization of 30-40 paise, or Rs 8,000 crore, is also paid through security receipts (SRs), which the bank is still holding. In reality, due to a lacklustre recovery, the bank is compelled to make over 50% provisions against these SRs.
SBI holds SRs worth over Rs 7,000 crore that was issued nearly five years ago. SBI's book value of SRs received for problematic loans sold to ARCs is now Rs 8,350 crore. The bank has additionally set aside 50% of the value of these SRs in case of a loss of value. The large provisions against SRs are due to ARCs' poor track record in settling problematic loans. After eight years, the bank will have no choice except to write off SRs. ARCs now purchase problematic loans from lenders or banks by paying 15% in cash upfront and the remaining 85% in SRs. It places the problematic assets in a trust and begins the resolution process through restructuring, management changes, and recovery. In most cases, the trust has 5 to 8 years to resolve the debt and repay cash against the SRs given to lenders. If the recovery does not occur, the bank will have to set aside profits and then write down all of the SRs. The majority of PSBs follow the SBI's lead in selling problematic loans to private ARCs. They are stuck with SRs that have been held for more than 5 years with little prospect of recovery.
Banks are now taking it slowly when it comes to selling problematic debts to private ARCs. According to the RBI, the amount recovered as a percentage of the total amount involved under the Insolvency and Bankruptcy Code (IBC) was 45.5 percent in 2019-20, followed by 26.7 percent for ARCs. "While the amount recovered through ARCs as a percentage of the amount involved was substantially greater in the early years of their establishment, it has dropped below 30% in subsequent years, with the exception of a spike in 2017-18," the RBI report notes.
The new bad bank or PSB-backed NARCL is being established to enhance the PSBs' realization; however the problems of resolving and restructuring a bad loan persist, since many of these assets have very little value remaining due to large-scale fraud, unsustainable debt, and repeated court cases.