Public sector banks have a significant challenge selling stressed and non-performing loans and most of the assets that they sold in the June quarter had already been put on the market before.
State-owned banks issued loans with principal outstanding of ₹49,746 crore in the first quarter of this financial year. Of which ₹39,671 crore, or nearly 79.7%, were repeat sales. The numbers point to the difficulty lenders are facing in finding buyers who will buy large stressed accounts at prices acceptable to both sides.
In public sector banks, ₹1.45 lakh crore of total dues was put on the block when accumulated interest is included. Of this amount, repeat accounts accounted for around ₹1.03 lakh crore, or about 71% of the total dues offered. The large share of repeat processes indicates that many stressed accounts are not finding successful buyers during their initial appearance in the market, forcing banks to bring them back for another attempt.
The trend also underscores the delicate nature of India’s stressed asset market. A bad loan doesn’t just go to an interested buyer: Banks and potential buyers need to agree on the value and recovery prospects of the underlying asset, the legal status, collateral quality and the likely time to recover outstanding debts. Buyers of distressed assets tend to be willing to pay significant discounts for their bad assets and have to take on the risk of delayed recovery, litigation and uncertain cash flows. Banks may be unwilling to accept valuations that result in big losses in comparison to the outstanding value of their loans.
The scale of repeat attempts becomes clear when we look at individual lenders. Indian Overseas Bank offered ₹19,523 crore of loans during this quarter and its entire pool consisted of accounts that had been offered before. Indian Bank also had a large proportion of repeat accounts. Of ₹15,880 crore it put out on the market ₹15,730 crore had already been offered.
Other state-owned lenders showed similar patterns. Central Bank of India offered a ₹1,934 crore pool, all of which represented repeat processes. Union Bank of India also saw its entire ₹762 crore pool consist of previously offered accounts. At Bank of India, ₹174 crore of the ₹179 crore on the block were repeat accounts. With these numbers, the problem of repeat sale has become increasingly acute among public sector lenders.
But for banks, offering stressed loans is not necessarily a sign that they’ve abandoned recovery efforts. Asset sales can provide lenders with a clean exit from problematic accounts and reduce the burden of dealing with long-running non-performing assets. Asset reconstruction companies will purchase or take over stressed exposures and seek recovery in a way that is more likely to work (restructuring, settlement, or enforcement of security), depending on the situation.
There could also be balance-sheet implications of these transactions. In written-off accounts, selling stressed assets can yield recoveries that improve a bank’s financial performance. Lenders can also prepare for additional provisioning costs as the banking industry moves toward credit loss-based provisions as they take place. Better balance sheets, in the long run, can boost investor confidence and thus the valuation of listed financial institutions.
The situation is quite different for private-sector banks. In the same quarter, private banks offered corporate and retail loans with principal outstanding of ₹10,734 crore. Only ₹369 crore, or approximately 3.4%, involved repeat sale. Non-banking financial companies and housing finance companies offered another ₹2,992 crore, and repeat accounts accounting for ₹180 crore, or around 6%.
For public sector banks, private banks and non-bank lenders, loans with principal outstanding of ₹63,472 crore were offered during the quarter. Repeat processes were worth ₹40,221 crore or 63.4%, with public sector banks accounting for almost the entire repeated pool. This stark contrast suggests state-owned banks are having a much more difficult time resolving some stressed exposures through asset sales.
Private lenders also offered a wider range of retail and secured portfolios. ICICI Bank placed ₹752 crore of housing and property-backed loans on the market, while RBL Bank provided ₹712 crore of credit-card and personal-loan accounts. YES Bank put ₹643 crore of car and personal loans up for sale. Utkarsh Small Finance Bank offered a ₹727 crore pool consisting largely of microfinance and commercial-vehicle loans, while Bandhan Bank offered ₹304 crore of housing loans.
The repeated attempts for sale may force banks to re-examine pricing strategies and transactions. If potential buyers continually reject loan pools, lenders will have to consider whether reserve prices are appropriate and if individual accounts should be sold into smaller portfolios to attract more specialist buyers or not. And greater transparency in the collateral and the legal and recovery process would help to raise investor interest.
Thus, the June-quarter data show the magnitude of the challenges in the stressed-loan market in India. Although banks are still trying to clean their balance sheets up, the huge number of repeat offers indicate that it is still hard to dispose of bad assets for public sector lenders.
The ₹1.45 lakh crore pool put on the block and the ₹1.03 lakh crore in repeat dues show that sorting through bad debts is not only about finding the ones that are not going well but also about finding the right price and the right buyers to take on the risks.
As banks continue to build their balance sheets and adapt to changing provisioning standards, the performance of India’s distressed asset market will be closely monitored. The faster the resolution of stressed loans can be, the better capital efficiency and the less the legacy bad assets would be. But until buyers and sellers can bridge the valuation gap, many of these loans may return to the market and go through the cycle of sale again and again.
Comments
Please to leave a comment on this article.