RBI expands market for banks' stressed assets, proposes e-auction

The Reserve Bank of India (RBI) has expanded the market for banks' stressed assets by permitting them to sell these to other lenders, including non-banking financial companies and financial institutions.

The central bank also proposed an e-auction mechanism besides public solicitation of bids to attract a wide variety of buyers. For this, banks should lay down a board-approved policy in this regard, RBI said.

RBI has proposed active involvement of the bank's head office/corporate office in identification and sale of of stressed assets beyond a specified value, as may be determined by bank's policy.

Banks may also include assets that are classified as Special Mention Account for sale. Early identification will help in low vintage and better price realisation for banks, RBI said.

Banks should, with the approval of the board, identify and list internally the specific financial assets for sale to other institutions, including Securitisation Companies / Reconstruction Companies (SCs / RCs), at least once a year, preferably at the beginning of the year.

At a minimum, all assets classified as 'doubtful asset' above a threshold amount should be reviewed by the board / board committee on periodic basis and a view, with documented rationale, is to be taken on exit or otherwise. The assets identified for exit shall be listed for the purpose of sale.

Prospective buyers need not be restricted to SCs / RCs. Banks may also offer the assets to other banks / NBFCs / FIs, etc, who have the necessary capital and expertise in resolving stressed assets. In any case, participation of more buyers will result in better price discovery.

In order to attract a wide variety of buyers, the invitation for bids should preferably be publicly solicited so as to enable participation of as many prospective buyers as possible. In such cases, it would be desirable to use e-auction platforms. An open auction process, apart from attracting a larger set of borrowers, is expected to result in better price discovery.. Banks should lay down a Board approved policy in this regard;

Banks must provide adequate time for due diligence by prospective buyers, which may vary as per the size of the assets, with a floor of two weeks. The banks should also have clear policies with regard to valuation of assets proposed to be sold. In particular it must be clearly specified as to in which cases internal valuation would be accepted and where external valuation would be needed.

However, in case of exposures beyond Rs50 crore, banks shall obtain two external valuation reports. The cost of valuation exercise shall be borne by the bank, to ensure that the bank's interests are protected.

The discount rate used by banks in the valuation exercise should be spelt out in the policy. This may be either cost of equity or average cost of funds or opportunity cost or some other relevant rate, subject to a floor of the contracted interest rate and penalty, if any.

RBI has asked banks to review the efficacy of their extant policies on sale of NPAs, with focus on valuation of stressed assets, and rework their policies by appropriately adopting the above principles.

In order to make sure that sale of stressed assets by banks actually result in 'true sale' of assets and to create a vibrant stressed assets market, it has been decided to progressively restrict banks' investment in SRs backed by their own stressed assets.

With effect from 1 April 2017, where the investment by a bank in SRs backed by stressed assets sold by it, under an asset securitisation, is more than 50 per cent of SRs backed by its sold assets and issued under that securitisation, the provisions held in respect of these SRs will be subject to a floor.

This floor will be progressive provisioning as per extant asset classification and provisioning norms, notionally treating book value of these SRs as the corresponding stressed loans, assuming these had remained, without recovery of principal, on the bank's books.

In effect, provisioning requirement on SRs will be higher of the provisioning rate required in terms of net asset value declared by the SCs / RCs and provisioning rate as applicable to the underlying loans, assuming that the loans notionally continued in the books of the bank.

With effect from 1 April 2018, the threshold of 50 per cent will stand reduced to 10 per cent.

In addition to the existing disclosure requirements, banks shall make detailed disclosures pertaining to their investments in security receipts, including SRs issued within past 5 years, SRs issued more than 5 years ago but within past 8 years and SRs issued more than 8 years ago as also the book values.