Higher cash payout dampens junk loan market

MUMBAI: The junk loan market has almost come to a halt. Banks are unable to offload bad loans after the Reserve Bank of India (RBI) changed the rules on loan sale this August.
The regulator has asked asset restructuring companies (ARCs), which deal in junk loans, to pay more cash for stressed assets — a move that has widened the price that ARCs are willing to pay and what banks demand.

Higher cash payout has prompted ARCs to reduce the valuation of the loan. But this has not gone down too well with the commercial banks. The market for bad loans had revived last year with banks selling close to Rs 50,000 crore of loans to ARCs.

In the first five months of the current financial year, industry experts said banks sold Rs 30,000 crore of bad loans for a consideration of Rs 15,000 crore. But since August, even as Rs 25,000 crore of bad loans were on block, only Rs 1,000 crore could be offloaded for a consideration of around Rs 600 crore.

Bankers said the revised formula in pricing of bad loans has had a big impact. In the revised norms, ARCs have to pay at least 15% of consideration amount in cash while the remaining could be in the form of security receipts (SRs). Prior to this, the structure was 5:95 wherein only 5% of the consideration was in cash and balance in SR. Today, it is 15:85. SRs are like debentures maturing after 5-8 years and ARCs declare their net asset values every year for the purpose of mark to market valuation. There are 14 ARCs, of which Arcil, Edelweiss, J M Financial and International ARC are the most active.

Bankers said that RBI revised the norms based on perception that ARCs are bidding too aggressively to acquire stress assets. In order to ensure ARCs have more skin in the game, it directed ARCs to pay more cash to buy distressed loans. Accordingly, ARCs will now have to subscribe to SRs to the extent of 15% of the consideration amount and pay cash to banks. “This means that ARCs will need higher capital and be very choosy about the assets they acquire and price they pay,” said Siby Antony, MD and CEO of Edelweiss ARC.

Public sector banks are keen to offload distress loans as non-performing assets continue to eat into their profits. However, most banks are unwilling to lower reserve price for the sale of loans.