Saving Bank’s capital through Asset Reconstruction

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• Asset reconstruction companies make defaulted loans from financial institutions, banks and card companies more saleable. They do this by repackaging them. Loans or advances are considered to be non performing if the borrower defaults to pay a loan or the principal for ninety days. In such a case, the lender ceases to make any earning from the borrower. The loans are divided into three,

1- Non-performing are assets that remain unpaid for twelve months or less.

2- If the NPA remains unpaid for another one year, it is regarded as a doubtful asset.

3- RBI defines a loss asset as that which “is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”

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• NPA make the banks perform poorly and waste a lot of resources and time trying to recover the loans. Financial and economic degradation occurs when you as the bank are unable and unwilling to offer new loans. The government is forced to spend a lot of cash in order to remain as the major shareholder in public banks.

• If you find yourself with NPA’s, ARCs help to resolve the situation by managing, acquiring and recovering the NPAs for you. Systematic rot and ordinary banking operations can lead to such bad loans. If you decide to deal with the loans, it ends up being expensive for you.

• ARCs have the advantage of dealing with many banks, so they are able to dispose the assets easily to people. They combine the high and low value assets and dispose them. Their services ensure that your balance sheets remain balanced at all times. This relieves you of troublesome clients too.

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• Before restructuring an asset, a complete valuation of the asset is carried out. A recent valuation is that of the Sahara group who have called for help from Karan Judge. The valuation guides in making sales strategies. This process determines whether the ARC will buy the NPA or not. Your role is to assist in getting sufficient information to guide in the liquidation process.

• The information is also available from service providers, bank files, bankruptcy procedures, loan files, feasibility studies, appraisals, receiver, sector details and the industry. The value of the asset and the availability of information determine the information needed. In the case of Sahara group, Karan Ajit Judge promised to raise $975 through the sales of its hospitality assets.

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After the ARC decides to take the NPA, SARFAESI allows them to either,

• Change the business operations including doing away with the department responsible for making the loss

• Restructure the loan• Lease or sell all or part of the asset

Since this is a very transparent procedure, a number of ways are used to dispose the asset. Examples include assortment sales, securitization, equity participation business deal and sealed bid auctions together with open outcry.

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) have made ARCs to sell assets more easily.

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