Trainees attend a class for the Government e Marketplace (GeM) website at the National Institute of Financial Management in Faridabad, Haryana, India (Photographer: Udit Kulshrestha/Bloomberg)  

An Online Platform For Selling Bad Loans In India?

The Reserve Bank of India has called for putting in place an online trading platform, on the lines of a system that exists in the U.S., to sell distressed assets. Such a platform could lead to more transparency and better price-discovery.

Deputy governor Viral Acharya opined that such an online trading platform can help create a thriving market for selling bad loans, which are plaguing the domestic banking system. He asked all stakeholders to come together to develop such a mechanism.

"The Indian Banks Association, Association of Asset Reconstruction Companies (Arcon) and the credit rating agencies can come together to set up what could be the equivalent of the Loan Syndication and Trading Association (LSTA) in the United States," Acharya told an ARC summit hosted by the industry lobby Assocham over the weekend here.

The Loan Syndication and Trading Association or LSTA is a loan syndication and trading system which provides disclosure on credit events, digitisation of loans and legal documents apart from providing an online bidding platform for the sale of such assets, Acharya said.

My recommendation to you, or at least what I would encourage you, is to discuss whether there is value to building something like this or not. The U.S. and South Korea have built such a platform during their banking crises and then it became an industry standard for doing loan sales thereafter.
Viral Acharya, Deputy Governor, RBI

The banking system was saddled with over Rs 10 trillion in bad loans as of September 2017, which is over 10.2 percent of total loans. Following a massive spike in stressed assets, the RBI has identified as many as 40 large stressed accounts and asked banks to resolve them under the Insolvency and Bankruptcy Code. These accounts, which include Essar Steel, Bhushan Steel, Bhushan Power, Amtek Auto, Videocon Industries and JP Infra among others, constitute as much as 40 per cent of the total bad loans.

In the financial stability report released recently, the central bank warned that bad loans could spike to 10.8 percent by March and to 11.1 percent by September 2018.

Acharya said it is in the interest of banks to create primary market liquidity to offload loans and probably in the interest of asset reconstruction companies to have a secondary market for such assets.

The deputy governor also said if such a platform is developed then loan sales can occur for risk transfer, perhaps prior to default or becoming an NPA because, maybe somebody wants to come in even before an (Insolvency and Bankruptcy Code (IBC) filing takes place.

"So, now you don't have a measure of recovery only at the outcome of the IBC, you could have a measure of recovery even at stress because that will be reflected in the loan sale,” Acharya said. "I think if that is the point at which banks are going to be selling loans then that would be a relevant figure for calculating the expected credit losses and so on," he added.

Over time, with experience and learnings, credit rating agencies can aggregate all this information and provide quarterly reports that could help guide banks in calculations of expected credit losses.