Financial Daily from THE HINDU group of publications
Sunday, Jul 17, 2005
Money & Banking
Banks can sell NPAs of over 2 years to other banks: RBI
Mumbai , July 16
BANKS can sell only non-performing assets (NPA) of two years and above to other banks, said a guideline issued by the Reserve Bank of India.
The RBI has issued this directive to develop a healthy secondary market for NPAs where securitisation companies and reconstruction companies are not involved.
It is also expected to increase the options available to banks for resolving their NPAs.
Banks should sell NPAs to other banks only on a cash basis, and the entire sale consideration should be received upfront. The asset can be taken out of the books of the selling bank only on receipt of the entire sale consideration, the guideline stated.
The purchasing bank should hold the NPA in its books for at least 15 months before it is sold to other banks. The guideline also warns banks against selling NPAs back to the bank from which they had purchased the NPA.
If the purchasing bank is unable to meet the price, the selling bank should not be obliged to meet the shortfall.
Once the NPA is sold to another bank, the selling bank should not be involved with the asset sold and should not assume operational, legal or any other type of risk relating to financial assets. Also, after it is sold, the asset should not enjoy the support of credit enhancements or liquidity facilities.
Any recovery in respect of NPA purchased from other banks should be first adjusted against its acquisition cost. Recoveries in excess of the acquisition cost can be recognised as profit.
For the purpose of capital adequacy, banks should assign 100 per cent risk weights to the NPA purchased from other banks. In case the NPA is an investment, then it will attract capital charge for market risks too. For non-banking financial companies, the relevant instructions on capital adequacy will be applicable.
An NPA purchased by a bank should add value to the bank and the purchasing bank should bear the entire credit risk associated with non-performing financial assets.
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