India’s commercial banks are setting out to aggressively clean up bad loans from their balance sheets.
In what could be the biggest auction of bad loans in the Indian banking industry, at least seven commercial banks—six in the public sector and one in the private sector—plan to auction distressed assets worth around Rs8,000 crore in the next two months.
The latest sale is at least 13% of the estimated distressed assets held by the banking industry as a whole.
The industry sold about Rs4,000 crore worth of distressed assets spread over the entire fiscal 2006-07.
The banks that have lined up auctions for bad loans include Bank of Baroda, Union Bank of India, Indian Bank, Central Bank of India, Allahabad Bank, Dena Bank and ICICI Bank Ltd.
Bank of Baroda plans to sell Rs500 crore worth of bad loans and Union Bank about Rs400 crore. The individual quantum of loans that the other five banks want to auction is not entirely clear but industry sources said the overall size of auctions could end up being closer to Rs10,000 crore when all is said and done.
Bank of Baroda has appointed audit and advisory firm PricewaterhouseCoopers India to value the bad loans. Deloitte Haskins and Sells, a chartered accountancy firm, is doing the job for Union Bank.
“Our non-performing loans are very low, but still we would like to sell the portfolio in tranches to take advantage of the whole gamut of opportunities that a growing economy offers,” said Anil Khandelwal, chairman and managing director, Bank of Baroda.
A bank needs to provide for non-performing loans. Hence, if it is able to clean up the balance sheet, its profitability goes up.
Under Reserve Bank of India (RBI) norms, commercial banks are allowed to auction their bad assets to qualified institutional buyers, such as asset reconstruction companies and other banks. Typically, a bank that wants to auction bad assets appoints an independent adviser to value such loans. At the second stage, it invites bids from various financial entities.
Interested buyers, such as asset reconstruction companies as well as some foreign banks operating in India, first carry out an audit of such loans to arrive at their own valuation. Finally, they send their bids and the highest bidder wins.
There have been instances when bids are made at a much lower price than what a bank expects the bad assets would fetch. In such cases, the banks normally negotiate with the highest bidder to arrive at what it feels is a fair valuation of the assets. In the past year, certain auctions proposed by banks such as Punjab National Bank and Punjab & Sind Bank had fallen through as the bids did not match the banks’ valuation of assets. Normally, no reserve price is kept for such auctions.
In 2005-06, apart from the predominant player in the field of asset reconstruction—Asset Reconstruction Co (India) Ltd (Arcil)—foreign banks such as Deutsche Bank, Standard Chartered Bank, Barclays Bank and Bank of America were active participants in bank auctions. In the forthcoming auctions, International Asset Reconstruction Co. Pvt. Ltd (Iarc), which has just started operations, plans to bid aggressively. Says Birendra Kumar, managing director and chief executive officer of Iarc: “We will do our best to bid for such assets as they present a great opportunity.”
S. Khasnobis, managing director and CEO of Arcil, says banks are in a hurry to sell bad assets as they prepare to lend more. He also thinks that banks are now queuing up to sell bad assets as they feel that asset reconstruction companies and foreign banks are flush with funds and can buy bad loan portfolios paying cash. In the past, Arcil used to offer security receipts for such loans that can be redeemed after the loans are recovered.
The fast approaching Basel II norms, which raise risk weight on assets, are also prompting banks to sell their bad loans.
Over the past few years, Indian banks have systematically brought down their non-performing loans.
For the fiscal year ended 31 March, 14 of 48 domestic banks had zero non-performing loans. Uco Bank has the highest net non-performing assets of 2.14%.