NBFCs target public banks' bad loans

Non-banking finance arms of Citigroup, Standard Chartered, Rabo Finance, DSP Merrill Lynch and Kotak Mahindra are queuing up to buy bad loans.

This has been triggered by the Reserve Bank of India's (RBI) circular issued in April, enabling sale of bad loans between banks, financial institutions and NBFCs.

These NBFC arms have already started approaching various public sector banks to buy bad loans. State Bank of India (SBI), the country's largest bank, plans to sell about Rs 2,000 crore of its bad loan portfolio in the current year. It has an in principle board approval to conduct the sale.

"We are in talks with Citigroup, Standard Chartered, Rabo Finance, Actis, Kotak Mahindra and DSP Merrill Lynch for the sale," said a senior SBI official.

The bank is in the process of identifying the bad loans it wants to sell, following which a valuation of the assets will e conducted.

A valuation committee will then set a floor price for the assets and any bids above the floor price will be considered. Foreign investors have been eyeing the bad loan market in the country for some time now.

However, lack of regulatory clarity was a hindrance till recently.

Analysts expect a secondary market in bad loans will develop in India as is the case in more mature markets. Other public sector banks are also likely to conduct similar transactions once SBI sets the ball rolling.

Prior to the issuance of the RBI's guidelines, ICICI Bank had sold some bad loans to Kotak Mahindra Bank.

"Initial transactions may happen at prices lower than realisable value," said senior officials at PricewaterhouseCoopers (PwC). This is because banks value NPAs at their book value and the NPA markets are not fully developed.

In vast contrast, the Asian markets have seen sale of NPAs heating up, particularly in Taiwan and Korea. Taiwanese banks disposed of over $2.6 billion worth NPAs through seven auctions last year, while more than 10 institutions in Korea put NPA portfolios totalling $4.6 billion up for sale, said sources.

SBI sees enormous advantage in selling bad assets to an NBFC vis-a-vis the Asset Reconstruction Company of India Ltd (Arcil). This is because selling assets to another bank/ NBFC as per RBI norms can be in return for cash.

While selling to Arcil, however, banks get an instrument, called a security receipt. The returns on the security receipt are not assured, and are linked to the level of loan recovery from the asset once sold.

SBI plans to sell a mixture of bad loans from its books and some written-off accounts, which are currently off its balance sheet.

The cash received from the sale of bad loans will mostly go towards provisioning of bad loans and the sale of the written-off assets will go directly to the profit and loss account of the bank.

As per the RBI guidelines, the entire credit risk associated with the bad loan would be transferred to the purchasing bank/ NBFC.