RBI/2016-17/56
DBR.No.BP.BC.9/21.04.048/2016-17
September
1, 2016
All Scheduled Commercial Banks
(Excluding Regional Rural Banks)
Dear Sir,
Guidelines on Sale of Stressed
Assets by Banks
The Reserve Bank of India, as
part of the Framework for Revitalising Distressed Assets in the Economy,
had amended certain guidelines relating to sale of non-performing assets
(NPAs) by banks to Securitisation Companies (SCs)/ Reconstruction Companies
(RCs) (created under the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002) vide circular dated
February 26, 2014.
2. In order to further
strengthen banks’ ability to resolve their stressed assets effectively, it
has been decided to put in place an improved framework governing sale of
such assets by banks to SCs/RCs/other banks/Non Banking Financial Companies
/Financial Institutions etc. Detailed guidelines are contained in the Annex.
Yours faithfully,
(Ajay Kumar Choudhary)
Chief General Manager
Annex
Guidelines
on Sale of Stressed Assets by Banks
Policy on Sale of stressed
assets
In terms of extant instructions
of the Reserve Bank, the board of banks shall lay down detailed policies
and guidelines on sale of their stressed assets to Securitisation Companies
(SCs)/Reconstruction Companies (RCs). The policy, inter alia, shall cover
the following aspects:
i.
Financial
assets to be sold;
ii.
Norms
and procedure for sale of such financial assets;
iii.
Valuation
procedure to be followed to ensure that the realisable value of financial
assets is reasonably estimated;
iv.
Delegation
of powers of various functionaries for taking decision on the sale of the
financial assets; etc.
2. In order to enhance
transparency in the entire process of sale of stressed assets, it is
decided as under:
§ Identification of stressed assets beyond a specified
value, as may be determined by bank’s policy, for sale shall be top-down
i.e., the head office/corporate office of the bank shall be actively
involved in identification of stressed assets, including assets which are
classified as Special Mention Account, to be put on sale. Early
identification will help in low vintage and better price realisation for
banks;
§ At least once in a year, preferably at the beginning of
the year, banks shall, with the approval of their Board, identify and list
internally the specific financial assets identified for sale to other
institutions, including SCs/RCs;
§ 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 as indicated above;
§ 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. 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;
§ Banks should 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 Rs.50 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 shall 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.
3. Banks shall 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.
Investment by banks in security
receipts backed by assets sold by them
4. 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.
i) With effect from April 1,
2017, where the investment by a bank in SRs backed by stressed assets sold
by it, under an asset securitisation, is more than 50 percent 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 shall
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:
a.
provisioning
rate required in terms of net asset value declared by the SCs/RCs; and
b.
provisioning
rate as applicable to the underlying loans, assuming that the loans
notionally continued in the books of the bank;
ii) With effect from April 1,
2018, the above threshold of 50 percent will stand reduced to 10 percent.
Disclosure of Investment in SRs
5. In addition to the existing
disclosure requirements, banks shall make following disclosures pertaining
to their investments in security receipts:
Particulars
|
SRs
issued within past 5 years
|
SRs
issued more than 5 years ago but within past 8 years
|
SRs
issued more than 8 years ago
|
(i)
|
Book value of SRs backed by
NPAs sold by the bank as underlying
|
|
|
|
|
Provision held against (i)
|
|
|
|
(ii)
|
Book value of SRs backed by
NPAs sold by other banks / financial institutions / non-banking financial
companies as underlying
|
|
|
|
|
Provision held against (ii)
|
|
|
|
Total (i) + (ii)
|
|
|
|
Debt Aggregation – First right
of refusal
6. To enhance SC/RCs ability to
aggregate debt faster, a bank offering stressed assets for sale shall offer
the first right of refusal to a SC/RC which has already acquired the
highest and at the same time a significant share (~25-30%) of the asset,
for acquiring the asset by matching the highest bid. This requires the
process of price discovery via auction, as described elsewhere, to be done
first.
Swiss Challenge Method –
Enabling Low Vintage and Debt aggregation
7. In order to bring down the
vintage of NPAs sold by banks as well as to enable faster debt aggregation
by SC/RCs, banks shall put in place board approved policy on adoption of
Swiss Challenge Method for sale of their stressed assets to SCs/RCs/other
banks/NBFCs/FIs, etc. For this purpose, as indicated in paragraph 2 of this
circular, the board/committee of the board shall conduct periodic review
(at least once in a year) of their stressed - asset portfolio, with a view
to decide on the proposed course of action to resolve the portfolio in
terms of their loan recovery policy. During such review, the bank should
identify the assets which will be offered for sale among prospective buyers
and an authenticated list of such assets shall be maintained by the bank.
The list may, at the discretion of the bank, be disclosed to prospective
bidder on entering into confidentiality agreement. The broad contours of
the Swiss Challenge Method are as under:
I. A prospective buyer
interested in buying a specific stressed asset may offer a bid to the bank;
II. If the asset features in the
list of assets for sale maintained by the bank, and if the aforesaid bidder
offers more than the minimum percentage specified in the bank’s policy
(say, 30 percent of outstanding loan) in the form of cash, the bank shall
be required to publicly call for counter bids from other prospective
buyers, on comparable terms;
III. Once bids are received, the
bank shall first invite the SC/RC, if any, which has already acquired
highest significant stake (as indicated at paragraph 6 above) to match the
highest bid. Ceteris paribus, the order of preference to sell the asset
shall be as follows: i) The SC/RC which has already acquired highest
significant stake; ii) The original bidder and iii) The highest bidder
during the counter bidding process.
IV. Bank will have the following
two options:
i. Sell the asset to winning
bidder, as determined above;
ii. If the bank decides not to
sell the asset to winning bidder, bank will be required to make immediate
provision on the account to the extent of the higher of:
a.
The
discount on the book value quoted by the highest bidder; and
b.
The
provisioning required as per extant asset classification and provisioning
norms.
Buy-Back of Financial Assets
8. The extant guidelines of
Reserve Bank do not prohibit banks from taking over standard accounts from
SCs/RCs. Accordingly, in cases where SCs/RCs have successfully implemented
a restructuring plan for the stressed assets acquired by them, banks may,
at their discretion, with appropriate due diligence, take over such assets
after the ‘specified period’ (as defined in terms of extant guidelines on
restructuring) provided that the account performed satisfactorily during
the ‘specified period’. Banks may frame a board approved policy containing
various aspects governing such take over viz., type of assets that may be
taken over, due diligence requirements, viability criteria, performance
requirement of asset, etc. However, a bank cannot at any point of time take
over from SCs/RCs the assets they have themselves earlier sold.
|