Banks Sell Half Of The Loans Put Up For Sale This Fiscal
Banks managed to sell half of the loans they put up for sale this fiscal at better prices than last year, according to four people familiar with the numbers, as recoveries through insolvency process are expected to rise.
Asset reconstruction companies purchased at least Rs 22,000-crore loans from a total of Rs 40,000 crore banks tried to sell in the year ending March, the people said on the condition of anonymity as details of stressed-asset sales aren't public. By comparison, ARCs had bought Rs 17,500-crore loans in the previous financial year from the pool of Rs 30,000 crore.
To be sure, the numbers are provisional and could change by March 31 as ARCs and banks reach a consensus on further sales.
ARCs got discounts of about 50-55 percent to the book value, the people cited earlier said. That’s lower than 55-60 percent in the previous fiscal, the first of the four people cited earlier said. What that means is lenders got more for their loans.
One reason for lower discounts this year is potential recovery under the Insolvency and Bankruptcy Code. As the process draws to a close for a number of the 40 large corporate accounts under insolvency process since 2017, ARCs don’t mind paying slightly more in all-cash deals, the first person said. Once the ARC has purchased the loan in cash, he said, any upside in the recovery will remain with it.
Banks saw improved recoveries and upgrades in the current financial year as the resolution of a few large cases under the bankruptcy law yielded encouraging results, according to a report released by ICRA Ltd. on March 14. In the first six months ended December, banks have seen resolution in at least four cases with a cumulative exposure of the industry at Rs 70,000 crore.
Cases like Essar Steel Ltd. and Bhushan Power & Steel Ltd. are expected to be closed soon, where loans worth nearly Rs 1 lakh crore are pending resolution. ICRA estimates that lenders could recover around 75-80 percent in these accounts, higher than the provisions set aside.
Two ARCs Buy Nearly All The Loans
ARCs mostly paid cash after the banking regulator made it difficult to transact using security receipts. Banks also prefer all-cash deals as the recovery is immediate, helping them save on provisioning.
Two large ARCs bought nearly all the loans sold by banks.
- Edelweiss Asset Reconstruction Company Ltd., India’s largest buyer of stressed assets, bought about Rs 12,000 crore worth of loans at Rs 5,200 crore this fiscal, two of the four people cited earlier said.
- Asset Care & Reconstruction Enterprise Ltd., backed by Hong Kong-based SSG Capital, purchased about Rs 8,000-crore loans at Rs 4,000 crore, the third person said.
Sale to ARCs is an important way for banks to offload bad loans. There are 26 such stressed-asset buyers in India that managed loans worth more than Rs 3.3 lakh crore as of March 2018, according to the Reserve Bank of India data. But apart from a few large ones like Edelweiss ARC, JM Financial ARC and ACRE, they continue to face fund crunch.
Smaller ARCs struggled to negotiate better prices with banks, according to Siddharth Goel, associate director at India Ratings & Research Pvt Ltd. That led to a slower growth of assets on their books.
Bharat Gupta, partner-turnaround and restructuring, EY, said larger ARCs have been able to access foreign funds and use them better as they have the reach and the right kind of talent. The ARC route will remain a viable option for banks looking to clean up their balance sheets as they haven't been able to close many restructuring proposals under the 2018 guidelines and insolvency resolution has taken longer than expected, he said.
Big Stressed Loan Sales
Jayaswal Neco: ACRE purchased State Bank of India’s Rs 1,400-crore loans to Jayaswal Neco Industries Ltd.—one of the companies listed in the second list of accounts identified for insolvency proceedings by the RBI in August 2017. According to the first two people cited earlier, they were sold at 35-40 percent discount to the book value.
The Supreme Court had ordered status quo in April last year after banks agreed on a restructuring plan. It’s likely that the plan will be favoured by the banking consortium over the insolvency process, leading to better recoveries, the two people said.
Bombay Rayon: JM Financial ARC purchased Rs 2,300-crore loans in Bombay Rayon Fashions Ltd. from SBI for Rs 900 crore, the two people said. The ARC, according to the company’s annual report, had earlier purchased about Rs 13-crore Bombay Rayon loans from ICICI Bank in 2016.
Not all such potential loan sales have found buyers. Earlier this year, SBI proposed to sell its loan exposure in Essar Steel to ARCs, other banks, non-bank lenders or any other financial institution. It offered loans worth over Rs 15,000 crore at a reserve price of Rs 9,587 crore.
The offer failed to garner interest as the bank wanted to introduce a claw-back provision, asking the buyer to pay it a portion of the recovered amount if the account was resolved in less than a year.
International Funds Show Interest
Banks have also seen renewed interest from international funds looking to tap India’s stressed asset market. For example, Bank of America Merrill Lynch financed ACRE in its Jayaswal Neco purchase, the first of the two people said.
BofAML submitted a bid for about Rs 1,900 crore worth of Essar Steel loans put up for sale by SBI. Even though the American bank offered 70 percent of the book value in cash, the sale was eventually called off after the bank didn’t find bidders for the rest.