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

Ashish Pandey

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Nonperforming Loans; Asset Reconstruction Companies, Auctions with contingent payments, Fair Value Accounting, Principal Agency Conflict, Indian NPA Crises (search for similar items in EconPapers)
JEL-codes: D5 G12 G13 G21 K2 (search for similar items in EconPapers)
Date: 2016-11-12
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