Home / Industry / Banking /  Dud loan hunters whip bad bank bids in Swiss Challenge

MUMBAI : The Swiss Challenge auctions conducted as part of the sale of non-performing assets to India’s bad bank are turning out to be a profitable proposition for bankers as many private asset reconstruction companies (ARCs) are willing to pay more for the same assets.

A senior banker said the results for Swiss Challenge auctions are encouraging, considering that the bidders are not only willing to take over the assets from all lenders but are also willing to pay more than the offer by the National Asset Reconstruction Co. Ltd (NARCL).

Under the system, lenders publicly call for counter bids to match the initial offers made by NARCL. If they do not get a better offer, NARCL wins the bid.

However, if counter bids exceed the NARCL bid, the bad bank can match the improved offer.

“We are looking for the best value for the bad loans. The Swiss challenge has opened up more opportunities," said the banker cited above, requesting anonymity.

Besides, there is one more benefit. While the bad bank pays 15% of the total bid in cash and the remaining amount as security receipts guaranteed by the government, private ARCs will have to pay 100% in upfront cash.

Lenders sell stressed loans to ARCs at a discount in exchange for either cash or a mix of cash and security receipts, although cash is preferred by lenders. The security receipts are redeemable when the ARC recovers the specific loan.

Although NARCL’s security receipts are backed by the sovereign, it is always better to get cash, which is what some of the private ARCs are offering, the banker added.

There have also been some delays in transferring the first assets to NARCL. Even as bankers decided to sell Jaypee Infratech to the bad bank, they are still awaiting the government guarantee to finalize the deal.

The Economic Times reported that Phoenix ARC offered 405 crore for steelmaker Mittal Corp. against the 228-crore bid by NARCL. According to an executive of an ARC, the strategic investors are interested in some bad loans earmarked for NARCL, and therefore assets are receiving better offers.

“For some of these assets, strategic investors are seeing more value than others. However, NARCL is ready to match bids in some cases under Swiss Challenge," the ARC executive said, seeking anonymity.

According to the banker, some delay was due to the inability of the lenders to promptly agree on the price at which they would like to sell the bad loans.

Before NARCL existed, private ARCs would quote different prices to different banks for the same asset to aggregate the loan.

“Some of the old problems of a joint lenders’ forum, where bankers found it hard to agree, holding up the whole process of asset resolution is still prevalent," he added.

Set up on 7 July 2021, the NARCL seeks to help rein in the bad-debt menace. Lenders had announced plans to transfer 22 bad accounts of 89,000 crore to the NARCL initially. The aggregate amount of bad loans likely to be transferred in tranches will be 2 trillion.


Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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