Indian Banks to See Significant Profit Boost from NPA Sales

MUMBAI: In a move that's set to significantly enhance the profitability of India's public sector banks, the Reserve Bank of India (RBI) has issued a new directive allowing banks to book profits on security receipts (SRs) received against fully written-off bad loans sold to asset reconstruction companies (ARCs). This policy change is expected to add a whopping Rs 20,000 crore to banks' earnings by the year-end.

The Role of NARCL in Cleaning Up the Financial System

Central to this development is the National Asset Reconstruction Company (NARCL), a government-backed "bad bank" established to cleanse the financial system. Lenders, predominantly public sector banks, have transferred non-performing assets worth approximately Rs 24,000 crore to NARCL, receiving 15% in cash and the remainder in government-guaranteed SRs.

Immediate Profit Recognition and Its Implications

The RBI's latest circular permits banks to immediately recognize any excess amount from the sale of bad loans above their net book value as profit, provided the transaction involves only cash and government-backed SRs. This applies to both past and future transactions, although SRs must still be deducted from core capital, and dividends cannot be paid from them.

Industry Experts and Bankers Welcome the Move

"Government Guaranteed SRs are a class in themselves and needed a differential treatment in the books of bank/financial institutions," remarked Hari Hara Mishra, CEO of the Association of ARCs in India. Bankers have lauded the decision, highlighting the minimal risk of default due to the government backing of NARCL's SRs.