Why StanChart isn’t finding enough buyers for its stressed loans

The answer lies in the quality of the underlying assets and the lack of adequate recovery protection in India


Standard Chartered’s stressed loan book in India is populated with companies which are in commodity-related businesses. Photo: Bloomberg
Standard Chartered’s stressed loan book in India is populated with companies which are in commodity-related businesses. Photo: Bloomberg

Mumbai: Standard Chartered Plc is among the many lenders in India that are looking to offload their stressed loans. However, unlike Indian lenders, Standard Chartered has fully provided for these stressed loans giving the bank greater leeway to sell the loans at a discount.

Despite this, Standard Chartered has attracted lukewarm interest for the loans on sale. So far, only one stressed asset fund, Hong Kong-based SSG Capital, has expressed interest to buy the offshore loan book of Standard Chartered which accounts for nearly $1 billion of loans on sale, Mint reported on Monday . For the remaining onshore loans, three funds are interested in breaking up the book and picking up select assets.

It may be worthwhile to look at why there isn’t more interest in the loans on sale. The answer lies in the quality of the underlying assets and the lack of adequate recovery protection in India.

Standard Chartered’s stressed loan book in India is populated with companies which are in commodity-related businesses. These companies are plagued by fundamental issues, including falling commodity prices and excess capacity due to the expansion plans mapped out during the upcycle in commodity markets. With no clarity on how quickly and sustainably commodity prices can reverse, investors are cautious about picking up loans of firms in these businesses as an organic turnaround is not assured.

There is another reason.

In the event of an enforced recovery or liquidation, Indian laws do not permit a clean execution of such recoveries.

Pending cases in debt recovery tribunals (DRTs) have piled up. The Economic Survey, released in February, showed that more than Rs.4 trillion in cases were pending with DRTs at the end of fiscal 2015. This number was at just about Rs.1 trillion a decade ago. Over the years, the cases have piled up, but the amounts disposed and recovered have not increased.

In cases where banks have tried to take over control of and sell moveable and immovable assets, they have been hit by delays due to lawsuits filed by borrowers in civil courts.

This is what makes the Bankruptcy Bill important to improving asset quality in the Indian banking sector. Stressed asset funds are keenly watching developments related to the passage of the bankruptcy bill, which would allow them to enforce stricter recovery laws.

On 22 April, Mint had reported that the chances of an early passage of the bankruptcy law have improved significantly after a parliamentary committee reached political consensus on it. The Insolvency and Bankruptcy Code, 2015 was introduced by finance minister Arun Jaitley in the Lok Sabha on 21 December 2015. It seeks to create a unified framework for resolving insolvency and bankruptcy matters and is a key element in the government’s strategy to rid the financial sector of its bad debt problem.

As the bill gets closer to passage and as its provisions become clearer, lenders like Standard Chartered may find it easier to attract stressed asset investors.