Lenders need to make more NPA provisions

MUMBAI: Banks are looking at transferring newer nonperforming assets (NPAs) to the National Asset Reconstruction Company (NARCL). But the provision requirement is set to rise as the sale price is likely to be lower than the value of the loans on their books. At the same time, banks may not realise the proceeds from the sale of the first lot of bad loans, amounting to Rs 50,000 crore, during the first half of the fiscal. This is because the deadline for the sale has been pushed to September 2022.
The ‘bad bank’ NARCL was proposed in the 2001 Budget. Banks were to identify Rs 2-lakh-crore bad loans, which would have been sold to the NARCL for 15% cash and 85% security receipts backed by government guarantees. The government had agreed to provide a guarantee of up to Rs 30,600 crore to the security receipts, which put them on par with a cash sale. The transfer of bad loans to the NARCL was expected to release capital, which would helpfundgrowth.


In the first phase, fully provisioned assets of about Rs 90,000 crore were expected to be transferred to the NARCL, while banks would transfer the remaining assets with lower provisions in phase 2. Banks have started out with Rs 50,000 crore of identified assets. To enable the transfer, many lenders made accelerated provisions on the loan to bring the value closer to the sale price. The RBI is also keen that banks address all stressed assets early on in its interest rate-tightening cycle. Now, even as the transfer of the first lot is pending, the Indian Banks Association is engaging with lenders for a new set of large loans.
The additional provision requirement has come at a time when banks have had to make large provisions towards depreciation in the va- lue of government securities following the increase in interest rates (their prices fall as rates go up since they move in opposite directions).
With only six weeks to go for the second quarter to end, there is a possibility that the sale may take place only in the second half of the financial year. Banks said that transfer is taking time as all of them have to agree on the valuation at which the loans have to be transferred and some of the smaller lenders have not made full provisions. Getting all banks on board for the sale of assets to the ARC is a key requirement as without the agreement of 75% of creditors there cannot be a restructuring of the loan.