Tightened norms to impact growth; Banks may take a hit
Our interaction with ARC management suggests that post new norms on
asset sales, challenges will increase for both banks and ARCs. While
the need for increased capital (15% vs 5% of SRs earlier) and mode of
fee calculation will make ARCs more accountable, it will also
rationalise pricing in the system. Banks (especially PSUs) which have
been aggressive in asset sale may have to take hair-cuts and volume
growth will moderate. These banks may even shift back to the
restructuring route. Redemption ratio at 53% remains low. Capital
remains a challenge for ARCs and hence could be another reason for
slowdown in asset sale.
$ Industry practises currently lax: Relaxed norms on asset sale to
ARCs (including SMA2 accounts) by the RBI in Feb’14 led to banks
offering a huge number of bad assets in the past two quarters. To
chase growth ARCs acquired a large part of these assets. CRISIL data
suggests near 4x increase in SR’s O/s. in June’14E to Rs420bn vs
Rs88bn in June’13 (see exhibit 2). Further, given limited capital
contribution, relatively better fees and sale of relatively newer
assets, pricing improved to 55-60% of book value (vs 30-35% earlier).
$ Norms tightened, ARCs made more accountable: To bring sanity to the
asset sale process and make ARCs accountable for recovery, RBI sought
to a) increase minimum capital contribution to 15% of security
receipts (SRs) (vs minimum 5% currently) b) change the mode of
computing management fees to % of NAV (vs the current practice of
charging fees as % of SRs outstanding c) formulate a plan for
realisation of assets taken over within 6-months and d) include ARCs
in the Joint lender forum (JLF) process.
$ Experts suggest pricing rationalisation; Banks may have to take a
hit: Our interaction with ARC management suggests that while increased
capital requirement and changing the basis of calculation of fees will
make ARCs more accountable, experts say the process will also help
rationalise pricing in the system. Banks aggressive in resorting to
asset sale may have to take a hit as pricing and asset sales volume
could be on the lower side than presently. This, though, will also
depend on the age of assets sold and recoverability. RBI data shows
improvement in redemption ratio to 53% in Jun’13 (32% in Jun’10).
$ Outlook and the way forward: We were concerned over the sharp surge
in asset sale volumes as holding SRs does not take away the asset
risk. At our meeting, the Corporate Debt Restructuring (CDR) cell too
pointed to a decline in referrals during Q1’15. While the new norms
will help rationalise pricing and make ARCs more accountable, growth
will be slower and banks may even shift back to the CDR restructuring
route. PSU Banks namely BOI, Canara Bank, SBIN, and Union Bank have
resorted to huge sell-down in the past two-quarters (5-17% of their
opening GNPA) and they may get impacted. These banks have cumulatively
sold 10.1% of their opening GNPAs to ARCs in Q1’15 and compares to
6.8% in Q4’14 (see exhibit 1).
Thanks & Regards
--
Our interaction with ARC management suggests that post new norms on
asset sales, challenges will increase for both banks and ARCs. While
the need for increased capital (15% vs 5% of SRs earlier) and mode of
fee calculation will make ARCs more accountable, it will also
rationalise pricing in the system. Banks (especially PSUs) which have
been aggressive in asset sale may have to take hair-cuts and volume
growth will moderate. These banks may even shift back to the
restructuring route. Redemption ratio at 53% remains low. Capital
remains a challenge for ARCs and hence could be another reason for
slowdown in asset sale.
$ Industry practises currently lax: Relaxed norms on asset sale to
ARCs (including SMA2 accounts) by the RBI in Feb’14 led to banks
offering a huge number of bad assets in the past two quarters. To
chase growth ARCs acquired a large part of these assets. CRISIL data
suggests near 4x increase in SR’s O/s. in June’14E to Rs420bn vs
Rs88bn in June’13 (see exhibit 2). Further, given limited capital
contribution, relatively better fees and sale of relatively newer
assets, pricing improved to 55-60% of book value (vs 30-35% earlier).
$ Norms tightened, ARCs made more accountable: To bring sanity to the
asset sale process and make ARCs accountable for recovery, RBI sought
to a) increase minimum capital contribution to 15% of security
receipts (SRs) (vs minimum 5% currently) b) change the mode of
computing management fees to % of NAV (vs the current practice of
charging fees as % of SRs outstanding c) formulate a plan for
realisation of assets taken over within 6-months and d) include ARCs
in the Joint lender forum (JLF) process.
$ Experts suggest pricing rationalisation; Banks may have to take a
hit: Our interaction with ARC management suggests that while increased
capital requirement and changing the basis of calculation of fees will
make ARCs more accountable, experts say the process will also help
rationalise pricing in the system. Banks aggressive in resorting to
asset sale may have to take a hit as pricing and asset sales volume
could be on the lower side than presently. This, though, will also
depend on the age of assets sold and recoverability. RBI data shows
improvement in redemption ratio to 53% in Jun’13 (32% in Jun’10).
$ Outlook and the way forward: We were concerned over the sharp surge
in asset sale volumes as holding SRs does not take away the asset
risk. At our meeting, the Corporate Debt Restructuring (CDR) cell too
pointed to a decline in referrals during Q1’15. While the new norms
will help rationalise pricing and make ARCs more accountable, growth
will be slower and banks may even shift back to the CDR restructuring
route. PSU Banks namely BOI, Canara Bank, SBIN, and Union Bank have
resorted to huge sell-down in the past two-quarters (5-17% of their
opening GNPA) and they may get impacted. These banks have cumulatively
sold 10.1% of their opening GNPAs to ARCs in Q1’15 and compares to
6.8% in Q4’14 (see exhibit 1).
Thanks & Regards
--
