Security receipts (SRs) issued against bad-loan sales from seven-eight years ago are set to enter the stressed assets market as lenders seek to avoid provisioning against them. Both banks and non-banking financial companies (NBFCs) are likely to start hunting for buyers for SRs, with State Bank of India taking the lead, industry executives told FE.
The country’s largest lender by assets has issued a notice seeking bids for SRs with a face value of Rs 38 crore issued against its exposure to CM Smith and Sons by Invent Assets Securitisation & Reconstruction. The securities were assigned in January 2015.
“Time is not the essence for transfer of SRs. In the event of non-realisation of amount out of SRs, the bank is not liable to refund anything in part or full,” SBI said in the notice.
Executives from the stressed assets industry said SRs issued during non-performing asset (NPA) sales are now expected to be put up for sale, as for many of them, recoveries have not happened and erosion in the net asset value (NAV) may demand additional provisioning.
“Until a few years ago, there used to be structured deals in ARC sales – first under 5:95 and then under the 15:85 structure. SRs from these years are going to enter the market now as NAVs for many of them have depleted and that means the purpose of selling them to ARCs hasn’t fructified. So, to avoid providing against them, banks and NBFCs will both come to the market,” said a senior executive from the industry.
Most NPAs sold to ARCs since 2018 have been assigned through full-cash deals, which means that there were no SRs issued during the sale. In SRs, underlying cash flows are dependent on realisation from NPAs. Reserve Bank of India guidelines say investments in SRs may be aggregated to arrive at net depreciation or appreciation of investments under the category. Net depreciation, if any, must be provided for.
Prospective buyers for SRs are also mostly ARCs. According to industry executives, the quality of underlying assets for each set of SRs and their vintage are the two important factors that will determine the terms of sale. The most coveted SRs will have residential properties as the underlying, followed by commercial properties, office properties and industrial properties.
Lenders may have to take substantial haircuts as these assets are old. “Most of these sales are likely to be priced at 25-30 cents to the dollar because of the vintage of the asset,” the person quoted above said.