Banks’ clean-up act snags on high pricing

Banks’ clean-up act snags on high pricing

Aseries of bad loan auctions between April and now has flopped with no takers for an estimated Rs4,000 crore worth of poor assets that have been put on the block by India’s public sector banks.

This failure to offload the loans will delay a clean up of the banks’ balance sheets. The Indian financial system has accumulated atleast Rs1 trillion worth of bad assets and only about Rs30,000 crore of bad loans have been sold in the last two years.

State Bank of India Ltd, Industrial Development Bank of India Ltd, Indian Bank, Uco Bank, Punjab National Bank, Punjab & Sind Bank and United Bank, among others, are finding it difficult to sell their bad assets, according to asset reconstruction companies (ARCs) that are in the business of buying bad loans and restructuring them.

While some of the selling banks contend that they are not getting the right price for these bad loans, ARCs maintain that the banks have “unrealistic" price expectations.

The process of auction of non-performing assets (NPAs) is relatively new in India. The first auction took place in December 2004 and at that time banks offered 85% discount on the principal loan amount that they were selling. In other words, a Rs100 crore worth of poor quality asset was sold it at Rs15 crore.

With the reduction in NPAs through sales to ARCs and write-offs of bad assets, banks are now not willing to offer more than 50% discount on their sticky loans. Essentially, they are demanding higher price from the bidders.


Only one public sector bank had more than 2% of net NPAs of their loan advances in March and 10 others had more than 1% net NPA.

Industry experts say even though the auctions have stumbled, most banks are in no hurry to sell off these bad loans as they have already provided for most of these sticky accounts, following the Res-erve?Bank?of?India?(RBI)?norms.

Neeraj Garg, executive director at PricewaterhouseCoopers, a tax advisory and consultancy firm, says: “There is less systemic pressure on the banks to sell their NPAs. However, it would serve them well to clear their books ahead of the implementation of Basel II international norms and free up capital and human resources that have been deployed to recover the sticky loans."

Under RBI norms, commercial banks are allowed to auction their bad assets to qualified institutional buyers, ARCs 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 carry out an audit of such loans to arrive at their own valuation and the highest bidder wins.

ARCs normally issue either security receipts (in the form of units) or pay cash to the seller banks. Foreign banks and even non-banking finance companies can also participate in such auctions and they always pay in cash. There are three ARCs active in this field—Asset Reconstruction Co. of (India) Ltd, Asrec India Ltd and Pegasus Asset Reconstruction Co. Pvt. Ltd.

From the beginning of this fiscal year, banks have managed to sell barely two or three accounts out of a lot of 50-odd accounts bunched together in each auction.

For example, Uco Bank announced an auction of 57 sticky accounts in March and only one sticky asset was sold. After the first auction failed, the bank announced a second auction in September with 45 accounts and 11 of them could be sold.

A participating ARC official who did not wish to be named said that the bank was not ready to “see reason" and demanding an “exorbitant" price for these bad accounts.

S.K. Goel, chairman and managing director of Uco Bank, admits that there has been a mismatch in the price expectations of the bank and the bidders for their bad loan auction portfolio. Goel is, however, confident that the sale of at least 15 assets worth Rs50 crore will go through by November-end as the bank is still “negotiating with the highest bidder (and) we have a reserve price in the case of every account and have not compromised on it."

An official of a south India-based public sector bank that attempted to auction a portfolio of Rs1,700 crore in June also said “they are still negotiating with the highest bidder in auction process." Participating ARCs, however, say that this bank has set forth “high expectations" and the bidders will not relent.

Another senior official of a large Mumbai-based public sector bank said the price discovery process is harming the market for bad loans. “The system is faulty and is affecting the depth of the market."

A recent non-performing loans newsletter from PricewaterhouseCoopers says that several issues have emerged in the sell-off of these bad loans. Smaller accounts that form a part of the auction portfolio and “unpalatable" contractual conditions are the main reasons for the failure of these auctions.

“Lack of clarity in the sales process and inadequate time for due diligence" also hampers the auctions of these bad loans, the newsletter says.