Banks slowly reviving bad loan sales to ARCs, Rs 20k cr put on block in H1

Mumbai: After a washout in the first quarter, banks are gradually reviving bad loan sales to asset reconstruction companies (ARCs).Industry data accessed by ET show that banks have identified bad loans worth Rs 19,947 crore to be sold during the first half of the current fiscal. The majority of it, barring Rs 285 crore by State Bank of India (SBI), came in the second quarter ended September. Total value of accounts identified this year is less in comparison to the Rs 37,313 crore put on the block by banks in the first half of last year. To be sure, bank sales to ARCs were already on the way down last fiscal as banks preferred deals only on a full cash basis and also looked at other options to reduce bad debt, like one-time settlements with promoters, as these were quicker and considered more efficient. In the fiscal ended March 2020, about Rs 55,049 crore of bad loans were put up for sale, down from Rs 1.30 lakh crore in 2018-19, though it is not clear how much of these were finally sold in 2019-20. However, the Reserve Bank of India’s (RBI) annual trend and progress of banking report shows that banks recovered Rs 57,506 crore from sale of bad loans to ARCs in 2018-19. Hari Hara Mishra, director of UV ARC, said the flow of bad loans to ARCs will be slow this year though more loans are expected to come to the market in the fourth quarter. “With increase in stress in the financial system after Covid 19, the flow to ARCs may improve, particularly in Q4 of 2020-21, after in-house resolution measures like eligible Covid restructuring are invoked by financial institutions. Some part of the residual accounts may come to the market for sale to ARCs,” Mishra said. Out of the Rs 19,947 crore of bad loans identified for sale by banks, about 88% or Rs 17,527 crore have been put on the block by Central Bank of India. CEO Pallav Mohapatra said these accounts have been identified for sale during the year and a transaction will only be possible if they find the right price. “Typically, the board approves bad loans to be sold during the first quarter and we generally go to ARCs with these assets to gauge their interest. It is not that they are put into an auction right away because generally we prefer a Swiss challenge auction process to get the best price,” Mohapatra said. In a Swiss challenge auction, the initial bid is invited to be challenged by other bidders with a higher bid after which the initial bidder is allowed to match or better its challenger. Among the loans identified this year by Central Bank are Videocon Industries (Rs 2734 crore), Vovl Ltd (Rs 1440 crore) and Rolta India (Rs855 crore). Bank of Baroda is another public sector bank that has identified Rs 1750 crore of bad loans in the first half of the year including GVK Industries and Singhad Technical Education Society. However, Mohapatra said liquidity challenges faced by ARCs since last fiscal and the impact of the Covid pandemic will keep bad loan sales slow this fiscal. “This year, sales are likely to be tepid because ARCs do not have enough cash to spend. Sales will pick up only if banks agree to the sales in exchange for security receipts and not on a full cash basis, which is difficult to conceptualize in the current environment,” said Mohapatra.
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