How COVID-19 hits bad loan business

MUMBAI: Bad loans put up for sale had few takers in March, a traditionally busy month for such deals, with just about a third of the assets drawing bids in a market virtually shut down by the Covid-19 pandemic. Banks and NBFCs had put up about Rs 10,000-15,000 crore of […]

MUMBAI: Bad loans put up for sale had few takers in March, a traditionally busy month for such deals, with just about a third of the assets drawing bids in a market virtually shut down by the Covid-19 pandemic.

Banks and NBFCs had put up about Rs 10,000-15,000 crore of bad assets for sale in March, which is normally the busiest month in the calendar. But the offers drew bids for less than Rs. 5,000 crore.

State Bank of India, Bank of Baroda, IDBI Bank, Bank of India, HDFC Bank, Union Bank of India, Allahabad Bank, and L&T Finance are some of the lenders that put up assets for sale, dealers said. Individual lenders could not be contacted immediately for comments.

“Transactions now have to be looked at with fresh valuation matrix after the lockdown ends,” RK Bansal, MD at Edelweiss Asset Reconstruction Company. “In light of this, Security Receipts (SRs) should help revive the bad loan business. The momentum on the distressed assets resolution should continue.”

Before the outbreak, some bad loan transactions were happening in full cash, a preferred bet for banks/NBFCs. Usual fund flows from factories are now choked, as normal production is not taking place. This defeats the concept of a “going-concern”, which is crucial for higher valuations.

“Covid-19 came at the peak time for NPA sales, and NPA auctions almost came to a halt,” said Hari Hara Mishra, Director, UV ARC. “NPA auctions for sale to ARCs marked a sharp deceleration due to increased preference for 100% cash deals as provisioning requirement continued even after the account was transferred to ARCs on SR basis.”

SRs, which are tradable instruments, could help revive the market, but their acceptability remains rather narrow.

“If banks show flexibility to accept SRs, it will serve both purposes,” said Yash Jain, an independent investment banker focused on stressed assets resolution. “While bad loan transactions would continue, the velocity of all cash financial assets purchase transactions by ARCs may reduce considerably due to liquidity and valuation issues.”

Source Article

Lois C. Ferrara

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