By Dr Sanjay Chaturvedi, Editor
It is usual practice of Banks and Non Banking Financial Institutions ( NBFC) to sell the Non Performing Assets (NPA) or Bad Loans to the Assets Reconstruction Companies or their own branch or cell which sell the repossessed / symbolic possession properties in the open market through bidding / auction system.
This process has regulations. Unfortunately, ARCs/ Stressed Assets Divisions of banks are capitalising on such sale by putting reserve prices above market price whereas they have acquired such NPA in much lower rate, say even 15 to 35% of the loan value.
This acquisition value is throw away price because lender usually lend maximum upto 85 % of Agreement Value (Loan to Value LTV). The Agreement value do not include cash portion. Hence 15% margin in value of Agreement for Sale and atleast 20-30% margin in the real value as cash portion in the transaction. Hence by the time they lend and first EMI is due they have almost 50% value covered in the loan.
Now when they repossessed as borrower fail to pay the loan, they not only have 50% margin in assets but now they sell in the open market 110% of the Assets they acquired. Making huge money. Sometimes when such high artificial value enhancement do not get them buyer, they sell in private treaty to their “inner circle” for much lower value of the assets by citing that there are no takers for NPA.
Every advertisement in the newspaper or in public domain by way of website tenders etc, flooded with NPA properties and there are no takers for only reason that these assets are reserved at a price much above market value and not on the cost (les discount) value of assets acquired by the bank or NBFC.
ARCs must be accountable for the shareholders and investors’ money as they buy bad loans without any proper valuation and off load them at much much higher value of the market.