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SARB to buy Abil's 'bad' book for R7 billion! Here's how this sale of debts will work

by , 12 August 2014
African Bank Investments Limited, or Abil, has been thrown a lifeline.

On Sunday, the South African Reserve Bank (SARB) announced that it's placed Abil under curatorship with immediate effect. The unsecured lender will get a R10 billion capital injection and protection for creditors.

SARB has also bought Abil's 'bad' book for R7 billion as part of its efforts to save the unsecured lender.

If, like many business owners, you're not sure how this process works and how you can use it to your advantage, continue reading as we reveal what you need to know about the sale of debts.

Here's a little background on SARB's plan to save Abil
 

MoneyWeb reports that part of Abil's rescue involves SARB purchasing a substantial portion of the non- and under-performing assets and other high-risk loans from Abil in order to separate them from the 'good' bank.

In the report, Reserve Bank governor, Gill Marcus, says the 'bad' book currently has a book value net of specific impairments of R17 billion, for which the SARB would pay R7 billion.

'Collection against the bad book will be continued, and indeed strengthened, there is no payment holiday for anyone owing on a loan from African Bank,' Marcus said.

But how exactly does this sale of debts work?
 

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Here's what you need to know about the sale of debts
 

The reason Abil is selling its debt is to get cash flow.

Rather than battle to recover outstanding debts, many businesses opt to accept a slightly lower value for the entire debtors' list and so boost their cash flow. This is what Abil has been forced to do.

The first and most important issue to take into account when you sell debts is: Am I selling the debt on a recourse or a non-recourse basis?

Recourse basis means if the new buyer of the debts is unable to recover certain debts, he can hand them back to you as the seller. Therefore, he has a recourse against you.

Non-recourse basis means if the new buyer of the debts is unable to recover certain debts, he's unable to hand them back to you as the seller. He's stuck with the bad debt!

The second issue you must take into account when you sell debts is Vat. Selling debts comes with Vat consequences.

You must ask yourself this question: Am I (seller) registered for Vat on the invoice or payments basis? Asking this question is crucial because the different basis determines a different treatment of Vat.

We strongly recommend you check out these two articles: The first one explains the Vat consequences when you sell your debts on a non-recourse basis. The other explains how to deal with Vat when you sell your debts on a recourse basis.

There you have it: If you're battling to recover outstanding debts, you can opt to accept a slightly lower value for the entire debtors' list to boost your company's cash flow.
 



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