PremiumMany banks have started informal talks with asset reconstruction companies (ARCs) to sell some of the unsecured loans to clean up their balance sheets and free up capital for lending, people aware of the development said
MUMBAI : Lenders are planning to sell a pool of unsecured retail loans that have turned delinquent after the repayment moratorium ended for borrowers hit by the pandemic, said three people aware of the development.
Many banks have started informal talks with asset reconstruction companies (ARCs) to sell some of these unsecured loans to clean up their balance sheets and free up capital for lending, said the people cited above.
The loans that banks are selling were restructured under the Reserve Bank of India’s covid recast frameworks I and II, and are exiting the moratorium in phases till June 2023. However, analysts believe at least half of the retail loans that were recast exited their respective moratoriums already, while the rest will see their moratorium period end over the next few quarters. To be sure, not all of them would turn bad.
“We estimate that half of all retail loans that exited moratorium in mid-sized banks so far have turned delinquent. That said, these borrowers have not been hit by the third wave but are yet to recover from the effects of the first two waves despite various supportive measures," said one of the people cited above.
The high default rate indicates a large section of borrowers still feel the pain caused by covid-related lockdowns when millions of Indians lost their jobs or saw their incomes collapse. Unsecured loans offer higher returns to banks but are more vulnerable to adverse events and external shocks. But given the absence of collateral, lenders have little recourse if the borrowers default.
The person said that the slippages are predominantly seen at banks lenient in offering loan recasts.
“The commentary that most banks are making—not more than 20% of the recast book will turn bad—seems a bit optimistic, given the slippage numbers visible already," the person said.
Banks have restructured loans totalling ₹1 trillion under the first window and ₹1.19 trillion under the second window, data from rating agency Icra showed. While corporates accounted for 60% of the first window, the second was exclusively offered to retail and small business borrowers.
Executives at asset reconstruction companies said they are seeing some of these retail loans being put up for sale. “Since people have lost their jobs and businesses, some of those cases (in retail) are coming," said R.K. Bansal, managing director and chief executive, Edelweiss ARC.
According to Pallav Mohapatra, chief executive, Asset Reconstruction Company (India) Ltd, some banks are discussing such sales with asset reconstruction companies. “Some of the banks will try to recover these loans over time, but the ones who want to clean up their balance sheets without delay would sell them to ARCs. See, ARCs would not buy them at the book value but at a discount, and lenders will weigh the benefits of a discounted sale against the benefit of retaining such assets," said Mohapatra, adding that private banks would be keener to sell these loans than their state-owned counterparts.
On 6 January, Icra said that since slippage rate and repayment rate were much higher for private banks than public sector lenders, it possibly means that the moratorium period offered by public banks is likely longer than those by their private-sector counterparts. “As banks restructured most of these loans with a moratorium of up to 12 months, this book is likely to start exiting the moratorium from Q4 FY22 and Q1 FY23," Anil Gupta, vice-president (financial sector ratings), Icra Ratings, said in the 6 January note.
Non-bank lenders have also joined the fray after RBI’s 12 November circular sought to bring their asset classification norms on par with banks by 31 March, a move analysts said would lead to more bad loans at non-banking financial companies. However, the regulator has now extended the deadline by six months to September following requests from industry bodies.
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