High bids and low recovery: A possible case for non-performing loan auctions in India

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 non-performing 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 at in this paper raise concerns regarding the use of auction bids as an indicator of fair value on banks' financial statements. The paper offers certain recommendations to mitigate the impact of an erroneous auction design.