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Banks may get to buy assets of defaulters at reserve price


Banks may get to buy assets of defaulters at reserve price

Last updated: December 7 2012
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  • Banks may get to buy assets of defaulters at reserve price

    NEW DELHI: Amendments to an asset foreclosure law currently pending in Parliament could allow banks to defer the sale or disposal of assets seized from defaulting borrowers, allowing them to acquire the assets at the reserve price if there are no buyers.

    These changes, if passed, could make bank balance sheets more opaque from the perspective of investors and regulators, and could lead to an overestimation of the true value of assets seized by banks from defaulters.

    The amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, introduced in Parliament last December, are listed for passing into law in this session of parliament, and have not been referred to a parliamentary standing committee for scrutiny.

    The amendment bill makes changes in the way that banks treat immoveable property taken over from defaulting borrowers.

    Typically, the practice has been to attempt to sell such property at auction, while setting a minimum reserve price for the asset, determined after an independent valuation. Dues from the sale are then supposed to be adjusted against outstanding loan of the borrower. In a number of cases however, banks have not been able to get any bidders for the property at or above the reserve prices set by them.

    What the new amendments provide for in such cases is to allow an officer of the bank to bid for the property on the banks' behalf if there are no other bidders. Under the proposed changes, the bank will then effectively become the owner of the property following the 'auction' and can use the 'purchase price' paid by itself to reduce the loan outstanding to it.

    Under the Banking Regulation Act, banks cannot hold immoveable property beyond what is required for their own use for a period beyond seven years, extendable to 12 years with the Reserve Bank of India's permission. The proposed amendments make clear that this provision will apply to any property acquired by the bank through such auctions.

    Thus, the bank has a period of 7-12 years to dispose off an acquired property, and for which it has been unable to find a buyer. In the interim however, it can bid for the property itself and treat the loan dues as settled to the extent of the price that it pays for the property (to itself).

    Further, amendments do not clarify, and leave open the possibility, that the bank can bid a price higher than the reserve price that it itself sets for the auction. In fact, there is an inbuilt incentive in the legal changes for the bank to do so.

    "The amendments proposed will allow a bank to itself buy the secured asset that it had put on sale, that too, at a price higher than that offered by the market," says Rajiv Ranjan, president and chief executive officer of Reliance Asset Reconstruction Company.

    Ranjan explained that this will help the bank avoid taking a hit on its books which it would otherwise have been required to take and then sit over the property for 12 years without actually realizing any amount.

    "As against this, the existing scheme of sale of NPA to an ARC against issue of security receipts, where the ARC paid a minimum 5% in cash, and made efforts, independently, for recovering the assets, was better," he says.

    "In case of poor recovery, as investors, both ARC and the bank took hits at gradual intervals," Ranjan explains. "This was a better solution because, at any point of time, the value of assets was determined based on assessment of expected recovery by an independent, SEBI-approved rating agency."

    An accountant with one of the Big Four audit firms is more sanguine about the changes. "I really don't see any big changes as a result of this provision," he says. "The fact is that the valuation of the property has to be done by an outside agency, and if that valuation is low, then the bank has to take a hit anyway.

    Banks may get to buy assets of defaulters at reserve price - The Economic Times
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