No Private Matter

The UK-headquartered Standard Chartered Bank, with large operations in India, is scouting for buyers for $1.4-billion stressed loans given to Indian companies. The news, especially the quantum of the stressed loans, came as a surprise to many, as only public sector banks, or PSBs, which have more than two-third share in deposits and advances, had been hogging the headlines for bad loans all these years.

Standard Chartered is not alone. Several foreign and private banks are working overtime to sell bad loans as they come to terms with the stress in their loan books, taking tough decisions wherever required. "They are not going to wait until the cows come home," says a banking consultant, referring to PSBs' delayed action in recovering bad loans. Just six months ago, Axis Bank had put under the hammer two power assets worth Rs 1,850 crore. Interestingly, both were standard assets, that is, paying both interest and principal. But the bank took a view that these companies' performance and their capacity to repay may be hit down the line. Last month, the bank was in the news for taking possession of the headquarters of Noida-based Jaypee Infratech for non-payment of dues.

Historically, too, private sector and foreign banks have been quick in taking over assets of defaulting companies and using innovative ways to recover money. In fact, it was foreign banks that first introduced the culture of recovery agents in the credit card segment. Private banks started following this in personal, car, credit card and home loan segments.

And a proactive approach is what they need at the moment. While PSBs have the lion's share of stressed loans due to their presence in project financing, private sector and foreign banks have also not been able to escape the problem. Three banks - ICICI, Axis and Standard Chartered -have combined stressed loans of around Rs 50,000 crore. This is close to the total assets of the mid-sized Karnataka Bank. The situation in mid-sized private sector banks is not any better. For example, the stressed asset portfolio of Karur Vysya Bank, J&K Bank, Catholic Syrian Bank and Dhanalakshmi Bank is 7-8 per cent of advances.

Globally, asset sales are common and increased manifold in the post-2008 period. According to KPMG, sale of loans by banks in Europe crossed Rs 100 billion ($148 billion) in 2015. In this, the share of UK banks was more than one-third. One of the BRIC countries, Brazil, saw non-performing asset, or NPA, sales of $6.5 billion in 2015. Last year, State Bank of India sold assets worth Rs 12,478 crore to asset reconstruction companies or ARCs.

Many suggest that asset sales by private sector banks will increase more now as the operating environment has become even tougher. Last week, a report by credit rating agency CRISIL Ltd said that the quantum of debt downgrades reached an all-time high of Rs 3.8 lakh crore in 2015/16. The number of downgrades was 1,177 while the number of upgrades was 1,521. The second half (October-March) of 2015/16 was a pointer to the worsening corporate balance sheets as downgrades (755) surpassed upgrades (575).

"This kind of downgrades was last seen in 2012/13 when we saw a big shift in the external environment," says Pawan Agrawal, Chief Analytical Officer, CRISIL Ratings. The agency doesn't think that the business environment will change in a big way in the next few quarters. According to estimates, out of the Rs 3.8 lakh crore corporate debt, Rs 56,000 crore is rated BB and below. This implies inadequate safety regarding timely payment of financial obligations. The most affected are metal and infrastructure sectors, due to excess capacity and leverage.

Many big private and foreign banks such as ICICI, Axis and Standard Chartered have exposure to these sectors. The country's largest private sector bank, ICICI Bank, is sitting on stressed loans of Rs 27,188 crore. This includes NPAs of Rs 15,242 crore and restructured loans of Rs 11,946 crore. The pace of deterioration of asset quality could be gauged - as also suggested by CRISIL - from the Rs  4,529 crore stressed loans slipping from the restructured asset category to NPAs in 2014/15. The comparative amount in the previous financial year was Rs 727 crore. Some analysts fear that more restructured loans will fall into the NPA category in the coming quarters.

This brings us to the question of potential buyers of such assets. ARCs, facing capital constraints, have already acquired more assets than they can handle. The special debt restructuring mechanism, which allows management change by conversion of loans into equity, has also been a non-starter due to shortage of buyers. That is why Standard Chartered has already sounded out special situations funds like SCG Capital Management. KKR, too, has been in discussion with a couple of banks, including Standard Chartered, for opportunities in the stressed loan space. The biggest positive news on the front has come from the Kotak Group, which has got a credit line of $450 million from the Canadian Pension Plan Investment Board for investing in India's stressed loan market.

Watch this space for more.