Banking News

India’s first bad bank – the SASF, instituted two decades ago – to be wound down

India’s first bad bank, the stressed asset stabilization fund (SASF), a special purpose vehicle for housing bad loans that was created two decades ago is being wound down as it approaches the end of its life cycle, as per people aware of the matter.

SASF was set up as a trust by the Government of India in September 2004 to isolate bad loans of IDBI Bank and park them in a separate entity so the bank could have a cleaner balance sheet. The trust has a twenty year-life.

A process has been initiated for valuation of about 400 odd loans that were parked in the trust which have continued to remain non-performing. The loans will be sold after this exercise is completed to facilitate the closure of the bad bank, according to sources.

Asset reconstruction companies and funds are expected to evince interest in acquiring the loans.

Around Rs. 9000 crore of non-performing loans of IDBI Bank were transferred to the trust at the time of its inception. It has managed to recover about Rs. 6000 crore from the stressed accounts or two thirds of the non-performing loans.

Recoveries through the Insolvency and Bankruptcy Code (IBC) last year for banks were lower at 37% of total claims admitted of financial creditors by courts, data from the insolvency and bankruptcy board of India shows.SASF officials did not respond to ET’s queries.SASF is the precursor of the national asset reconstruction company limited or NARCL that was announced in 2021 by the union government to segregate bad loans of multiple banks.

In a two-step transaction undertaken in 2004, the Government of India (GoI) extended a loan to SASF of Rs. 9000 crore and the latter subscribed to zero coupon government bonds of the same value.

SASF then assigned the bonds to IDBI Bank as consideration for transfer of the latter’s stressed assets to itself. As the trust recovered money from the bad loans over time, it repaid the loan it had taken from the government. As the loan kept getting paid off, the bonds were extinguished.

For the remainder of the bonds, which are held in IDBI Bank’s books, provisions have been made for them through classifying them as non-performing investments.

In 2018, a public accounts committee (PAC) headed by now-Congress President Mallikarjun Kharge pointed out that, despite the fact that the exchange of cases was not permissible as the objective of the formation of SASF, eight cases were transferred to IDBI Bank in exchange for three cases.

As per the audit report, it was found out that in eight cases, which were transferred to IDBI in 2006, against a total loan outstanding of Rs 1522.29 crore, the recovery made was Rs 1,659 crore, while in three cases transferred to the trust in exchange, the recovery made was just Rs 360.32 crore.

The bank later admitted this oversight and decided to repay the trust Rs 1,064 crore in 11 installments, saying that through reimbursement by the bank, the loss on account of the transfer is expected to be neutralised.

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