Mumbai: The Indian Banks’ Association (IBA) is examining the possibility of setting up an online trading platform to sell bad loans, in a bid to improve price discovery and market liquidity.
“We will prepare a discussion paper as well as consult with all stakeholders including asset reconstruction companies (ARCs) and banks,” V.G. Kannan, chief executive of IBA, told Mint. However, there has been no concrete discussion so far on this matter.
Talking at an event on distressed assets on 20 January, Viral Acharya, deputy governor of the Reserve Bank of India (RBI), had urged banks and ARCs to collaborate for setting up an online trading platform for selling bad loans as it would help develop such a market.
“IBA, ARCON (Association of Asset Reconstruction Companies) and CRAs (credit rating agencies) can come together to set up the equivalent of Loan Syndication and Trading Association (LSTA) in the United States,” Acharya was quoted as saying in a release issued by The Associated Chambers of Commerce of India.
Indian banks are sitting on a stressed asset pool of over Rs10 trillion.
According to industry experts, an online platform can double up as a bidding platform, where live auctions can be conducted, with options for the bidder to remain anonymous. This can improve the sale valuation, especially in the current scenario where banks are selling large bad loans against the earlier preference for off-loading old non-performing assets (NPAs), usually with higher provisioning, of small and mid-sized companies.
“This has changed because of Insolvency & Bankruptcy Code (IBC). ARCs now prefer buying large value accounts as they want to aggregate debt to get a greater say in the resolution process. Usually, older vintage accounts have lower recovery prospects. In case banks are able to sell within a year of the account turning NPA, it will be definitely a better deal,” said a senior official of a large state-owned bank, requesting anonymity.
The online platform can work as a depository of information of various credit-related events including repayment schedule, where there was previous default, factors leading to sectoral stress, and if a particular exposure was sold by any bank in the past and at what valuation, among others. This could be helpful for other banks also interested in selling the asset, the banker cited above added.
Rating agency ICRA has internally started some work to facilitate the start of an online platform by evaluating new products and as well as making adjustment to existing ones, said Naresh Takkar, managing director and group chief executive officer.
“For various stressed assets or potentially stressed assets, we are looking at including recovery prospects as well. So far, the ratings only specify the chances of default rather than what happens after default. We are looking to do some work on recovery ratings,” he said, adding that the CRAs will be meeting IBA and ARCs to brainstorm about the platform and understand their requirements.
Differences over valuation often leads to cancellation of the sale of bad loans. While banks prefer all-cash deals, most of the transactions are structured under the 15:85 rule because of stretched capital position of ARCs. Under the rule, ARCs are required to pay banks a minimum of 15% of the sale value of the asset upfront, while issuing security receipts (SRs) for the rest. These SRs are then classified as an investment on the books of the bank and are redeemed on recovery from the bad asset. According to RBI data, as on 30 November, there were 24 ARCs in India.
Experts suggested that an online platform can help banks sell SRs to interested parties through the bidding process.
“There are Rs90,000 crore worth of SRs held by banks and they want to start trading in that. The valuation, however, could be a challenge as investors would be asking for deeper discounts. Listing of SRs has now been allowed, which will allow broadening of the investor base and deepening of the stressed assets market. Also, as the volumes go up and some of the bigger banks start to sell their SRs, the interest in stressed assets market will improve,” said Eshwar Karra, chief executive officer, Phoenix ARC Pvt. Ltd.
Last month, Securities and Exchange Board of India (Sebi) approved norms for listing of security receipts issued by ARCs. This was initially proposed in the Union budget to improve capital flows into the securitization industry and help tackle the bad loan problem.
Ajay Tyagi, Sebi chairman, has said detailed norms would be announced after consulting with the RBI.livemint