Guidelines on Sale of Stressed Assets by Banks

Policy on Sale of stressed assets

The policy and guidelines on sale of stressed assets to Securitisation Companies (SCs)/Reconstruction Companies (RCs) shall, inter alia, cover the following aspects:

i.          Financial assets to be sold;

ii.         Norms and procedure for sale;

iii.         Valuation procedure;

iv.         Delegation of powers for taking decision on the sale; etc.

It has been decided that

^§         Identification of stressed assets beyond a specified value, shall be top-down i.e., the head office shall be involved in identification of stressed assets, including assets which are classified as SMA, to be put on sale;

^§         At least once in the beginning of every year, banks shall identify the specific financial assets for sale to other institutions, including SCs/RCs;

^§         All assets classified as ‘doubtful asset’ above a threshold should be reviewed by the board on a periodic basis and assets identified for exit shall be listed for the purpose of sale;

§    Banks may also offer the assets to other banks/NBFCs/FIs, etc. who have the necessary capital and expertise;

^§         The invitation for bids should preferably be publicly solicited. It would be desirable to use e-auction platforms. Banks should lay down a Board approved policy in this regard;

^§         Banks must provide adequate time ( upto 2 weeks) for due diligence by prospective buyers;

^§         Banks should have clear policies with regard to valuation of assets proposed to be sold. However, in case of exposures beyond Rs.50 crore, banks shall obtain two external valuation reports;

^§         The cost of valuation shall be borne by the bank;

^§         The discount rate used by banks in the valuation exercise shall be spelt out in the policy, subject to a floor of the contracted interest rate and penalty, if any.

Investment by banks in security receipts backed by assets sold by them

It has been decided to progressively restrict banks’ investment in SRs backed by their own stressed assets.

i)                With effect from 01/04/2017, where the investment by a bank in SRs backed by stressed assets sold by it, is more than 50% of SRs backed by its sold assets, the provisioning requirement will be higher of the:

a.    provisioning rate required in terms of NAV declared by the SCs/RCs; and

b.    provisioning rate as applicable to the underlying loans;

ii)              From 01/04/2018, the above threshold of 50% will be reduced to 10%.

Disclosure of Investment in SRs

Banks shall make following additional disclosures:

Particulars		SRs issued Within past 5 yrs	SRs issued more than 5 yrs ago but within past 8 yrs	SRs issued more than 8 yrs 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

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 a significant share (~25-30%) of the asset, for acquiring the asset by matching the highest bid.

Swiss Challenge Method – Enabling Low Vintage and Debt aggregation

Banks shall put in place board approved policy on adoption of Swiss Challenge Method for sale of their stressed assets. For this purpose, the board shall conduct periodic review (at least once in a year) of their stressed - asset portfolio. During such review, the bank should identify the assets which will be offered for sale and an authenticated list of such assets shall be maintained by the bank. The list may 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, and if the bidder offers more than the minimum percentage specified in the bank’s policy 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 to match the highest bid. 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 above;

ii.         If the bank decides not to sell the asset, it 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

Where SCs/RCs have successfully implemented a restructuring plan for the stressed assets acquired by them, banks may, take over such assets after the ‘specified period’ (as defined in the guidelines on restructuring) provided that the account performed satisfactorily during the ‘specified period’. Banks may frame a board approved policy in this regard. However, a bank cannot take over the assets they have themselves earlier sold.

Based on RBI notification dated 01/09/2016. For any further clarification, please refer www.rbi.org.in