SBI May Partly Sell NPAs To Assets Reconstruction Companies

To bring Non-Performing Assets (NPAs) in shape, SBI, the biggest lender of the country, is considering partial sale of its NPAs to Assets Reconstruction Companies (ARCs) in the current quarter (Jan-March FY14). The rising NPAs are becoming a threat for the bank. In Q3FY14, gross NPAs of the bank rose to 5.73% from 5.30% in the corresponding quarter of previous year, while fresh slippages reached Rs 11438 crore in Q3FY14 against Rs 8175 crore in Q3FY13. Due to rising NPAs, the bank provisioning coverage ratio has dropped from 61.5% in Q3FY13 to 58.3% in December quarter of FY14. During the quarter, the bank has restructured standard assets worth Rs 6100 crore and has loan restructuring in the pipeline worth Rs 9500 crore.

According to the current instruction on sale of financial assets to ARCs, if the sale is for a value higher than the Net Book Value (NBV), the excess provision is not allowed to be reverse, but the bank will have to utilise the same to meet the shortfall on account of sale of other financial assets to ARCs. However, banks are required to provide any shortfall if the sale value is lower than the Net Book Value. With a view to bring in uniformity as also incentivising banks to recover appropriate value in respect of their NPAs promptly, the Reserve Bank will allow banks to reverse the excess provision on sale of NPA, if the sale is for a value higher than the NBV to its P&L account in the year the amounts are received. Further, as incentive for early sale of NPAs, the Reserve Bank will allow banks to spread over any shortfall, i.e, if the sale value is lower than the NBV, over a period of two years. 

This is first time that SBI is planning to sell its NPAs to any ARCs because NPAs for the bank is continuously mounting. The move is favourable for the bank as it will help to bring the NPAs in shape to some extent and will increase the bottomline of the bank.

From the last one year, SBI stock has not performed well and is quoting below 22% of what it was quoting a year ago. In the last nine months, the bank CD ratio has decreased to 78% in Q3FY14 from 82% in Q4FY13. Return on assets has decreased to 0.63% in December quarter FY14 from 1.03% in Q3FY13, while return on equity has dropped to 10.79% in Q3FY14 from 17.67% in corresponding quarter of previous year. The bank trailing 12-months earnings per share comes to Rs 205 as per quarter ended December 2013. The stock is currently trading at 8 times of its EPS (TTM), while price to book value comes to 0.93 times.