Bad loans on sale! But who's buying?

Thu, 10 Jan Pre-Open

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Lenders, who bankrolled Rs 70 bn in debt to beleaguered Indian carrier, Kingfisher Airlines have decided to take legal action. The airline has repeatedly failed to service and repay its loans. The Mumbai authorities have given away 6 out of the defunct carrier's 11 airport slots to Indigo Airlines and its operations have been suspended indefinitely. So, what do bankers do in such a situation?

Well, in order to clear their books of defunct loans, banks have been trying to sell the same to asset reconstruction companies (ARCs). Especially if these loans have legal issues in recovery, bankers prefer to enlist the professional help of ARCs. These firms purchase bad loans given to sick units from commercial banks. As per a recent regulation, ARCs can covert part of the debt into shares of the defaulting companies and purchase sticky assets of multi-state cooperative banks as well.

As of now, banks have put close to Rs 60 bn worth of bad loans on sale. IDBI Bank has put bad assets worth Rs 22 bn on sale, Allahabad Bank Rs 6 bn and Central Bank Rs 5.5 bn. Other banks which sold their bad loans earlier this year include United Bank of India, State Bank of Travancore, Lakshmi Vilas Bank and South Indian Bank. But usually banks go in for NPA sales during the third and fourth quarter of the financial year. This helps them clean up their balance sheet and reduce provisions. The money from such sales goes into the profit and loss account. However, this transaction usually happens at a discount since these loans are of poor quality. Typically when an ARC buys a bad asset from a bank, it makes a two part payment. One is in form of cash and the second is in form of a security receipt issued to the banks concerned. A bank can hold this receipt for seven years.

Well, as they say one man's bread is another man's poison. The prospects of ARCs look bright in India, considering the stress levels in the economy and the tremendous rise in bad loans and restructured assets. Gross non-performing assets (NPAs) of 40 listed banks rose by 47% to Rs 1.6 trillion in September from Rs 1.1 trillion earlier. But, despite the rise in NPAs, the business of ARCs is not swelling. Arcil, the largest ARC, added only Rs 2 bn to its books this fiscal. With the new regulations in place which will allows ARCs to take equity stakes which may reward them at a later stage, we may see many more deals taking place towards the end of the year.