In An Uncertain Year, Lenders Step Up Retail Bad Loan Sales
A bus conductor displays Indian bank rupee notes for a photograph in Coonoor, Tamil Nadu, India. (Photographer: Dhiraj Singh/Bloomberg)

In An Uncertain Year, Lenders Step Up Retail Bad Loan Sales

Indian banks and non-bank lenders are looking to offload a larger amount of retail bad loans this year as they manage the stress emerging from the Covid-19 pandemic.

Retail loans worth nearly Rs 6,000 crore are being put up for sale by various lenders, this year, according to three senior officials from asset reconstruction companies, who spoke on the condition of anonymity. This is higher than the usual run rate of Rs 2,000-2,500 crore in retail bad loan sales seen most years, these people said.

Soured retail debt makes up about 30-40% of the total loans up for sale this financial year. In total, banks and other lenders have put Rs 15,000-20,000 crore up for sale this year, which is lower than the Rs 50,000-1 lakh crore worth of bad loans that typically get sold each year.

Lenders have stayed away from large asset sales this year as older bad loans have already been sold and newer stressed assets have the benefit of special dispensations permitted by the Reserve Bank of India. However, many are choosing to clean up their retail loan books by taking a haircut and providing for them.

The assets up for sale include secured assets such as housing loans, loans against property, vehicle loans, as well as unsecured personal loans and credit card accounts.

“During the year we have also seen vintage retail NPAs come up for sale where recovery efforts were impacted by Covid-19 and banks and NBFCs were forced to sell the loans,” said Aswani Sahoo, executive vice president and chief investment officer, Arcil.

The retail bad loan sales come against the backdrop of rising stress. A Dec.8 report by Macquarie Research said that retail NPAs could spike to a 10-year high of 4% in the coming quarters. As of March 31, 2020, the system-wide retail NPA ratio stood at around 2%, lower than 3.9% reported in March 2009, right after the global financial crisis.

The report also said collection efficiency across the lending system had gone down in December compared to what was seen in September and October 2020.

Why Banks Are Selling

Banks look to sell retail bad loans to ARCs because it’s difficult to have a central recovery strategy for these accounts. Since retail accounts are usually managed by branch officials, banks find it tougher to oversee the recovery process from headquarters, the first of the three anonymous officials cited earlier said.

The retail lending head of a large private bank, while speaking on the condition of anonymity, said typically the “bounce rate” for a good quality book would be in the 5-10% range. As such, the collections team, whether internal or an agency employed outside the bank, are prepared to manage recoveries to that extent. As Covid-19 hit and the “bounce rates” went up, the collection capacity started to get clogged, which would have encouraged some banks to approach ARCs.

This banker said that typically, banks tend to sell older NPAs to ARCs, after having exhausted their recovery measures. However, the current crisis has led to a focus on recoveries, which may have prompted sales of more recent bad loans at a smaller discount.

According to the ARC officials cited earlier, secured retail assets, especially loans against property and mortgages, fetch a discount of 40-60% of the loan value, depending on the age of the loan. Unsecured loans usually see their book value reduced by 80-90% during sale to ARCs.

Not All ARCs Are Interested

While retail loan sales have gone up, not all ARCs are interested in buying these assets.

India’s first ARC, Arcil is among the larger purchasers of such assets. Phoenix ARC and some other smaller companies are also assessing the retail loan portfolios up for sale, the people cited earlier said.

The lack of appetite for retail accounts is largely because recovering these loans is a time consuming effort, which requires a special skill set. “We have built an in-house team of experts who use data analytics and a focused recovery approach, which helps in higher recoveries from retail accounts,” said Sahoo of Arcil.

“We are seeing retail NPAs being put on sale both by private banks and public-sector banks. Earlier, retail sales were more sporadic and in the last few months, there has been a 30-40% increase in action on retail sales by banks. We could see a lot more deals happening this year,” said Sanjay Tibrewala, chief executive officer of Phoenix ARC.

Moreover, as stressed lenders, such as Dewan Housing Finance Corp. Ltd., Reliance Commercial Finance Ltd. and Reliance Home Finance Ltd. see a change in ownership over the next few months, another pool of stressed retail and small business loans may come up for sale.

“The new owners of the stressed NBFCs would prefer not to spend time resolving older NPAs and want to start operations with a cleaner book,” said Vinayak Bahuguna, former CEO of Arcil.

According to data available in the latest edition of the RBI report on trends and progress in banking, the book value of outstanding loans sold to ARCs as of March 2020 stood at Rs 4.31 lakh crore, up 13.7% year-on-year. Against these loans, ARCs issued security receipts worth Rs 1.5 lakh crore.

While no current estimates are available, a report authored by Crisil Ltd. in August 2019 had estimated that the share of retail assets to total assets purchased by ARCs stood at 5% as of March 2019. Corporate loan accounts constituted 70% of the assets, while small and medium enterprises contributed 15%, with the rest being agriculture loans.

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