High Bids and Low Recovery: A Possible Case for Non-Performing Loan Auctions in India

Pandey, Ashish (2016): High Bids and Low Recovery: A Possible Case for Non-Performing Loan Auctions in India.

Abstract

This paper considers the possibility that the prices bid by asset reconstruction companies in India under a security receipt mechanism may not reflect the ultimate recoverable value of nonperforming loans. The paper establishes, using a model and simulations, that the price bid by asset reconstruction companies will reveal their own rational interest and can significantly exceed the recoverable value. The conclusions arrived in this paper raise concerns regarding the use of bids as an indicator of fair value on bank’s financial statements. The paper offers certain recommendations to mitigate the impact of an erroneous auction design.

• Item Type: MPRA Paper
• Language: English
• Keywords: Nonperforming Loans; Asset Reconstruction Companies, Auctions with contingent payments, Fair Value Accounting, Principal Agency Conflict, Indian NPA Crises
• Subjects: D - Microeconomics > D5 - General Equilibrium and Disequilibrium; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; K - Law and Economics > K2 - Regulation and Business Law

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