Bad loan sales by banks could shrink by half to around Rs 12,500 crore this fiscal as the Covid-19 pandemic has frozen large parts of the Indian economy over the last six months beginning April.
Moratorium on loan repayments and one-time debt restructuring as per the Reserve Bank of India (RBI) scheme will mean that the business of selling of stressed assets can return to normalcy only towards the tail end of the fiscal third quarter. Some banks have already put out a small portion of their non-performing assets (NPAs) on sale, but major activity is expected after the banks finalise how much of their loan book they are going to put out for restructuring.

Edelweiss ARC managing director & CEO Rajkumar Bansal believes that there will be a large NPA cake for the asset reconstruction companies (ARCs) to bite into, but the bottleneck will be the pricing of those assets and capital constraints. Banks are also insisting on all-cash deals, marking a departure from the earlier common practice of 15% upfront payment and issuance of security receipts by the ARCs.

"We don't see moratorium and one-time restructuring of loans by banks having any impact on the ARC acquisition business. The old NPAs offer enough scope for ARCs to be in the buying market. The issue is whether the ARCs have the money," said Bansal, while stressing that the bigger ARCs like Edelweiss are well funded.

Bad loans in the banking system are pegged at Rs 9 trillion. In order to provide relief to borrowers amid the COVID-led financial crisis, the RBI directed banks to provide a moratorium on loan instalments from 1 March for standard assets. For loans which go into recasting, the slippage into NPAs will be due after two years when the restructuring window shuts.

Phoenix ARC CEO Sanjay Tibrewala expects banks to put Rs 10,000-12,000 crore of soured loans up for sale this fiscal year, as against Rs 25,000 crore in FY20. "With the moratorium ending and the RBI guidelines on restructuring being very tight, we expect 30-40% of the troubled loans to be recast. Banks will have to come up with a solution for the remaining portion. The quantum of bad loans for sale will see a sharp fall this financial year because we have almost completely lost the first six months. As these NPAs spill over, there will be more opportunity in FY22. ARCs will have to raise capital and be ready," he said.

Bansal fears that a large number of deals may fail to conclude or get drawn into longer periods of negotiation due to pricing mismatch between the banks as sellers and ARCs as buyers of stressed assets. "If the banks continue to look at all-cash deals and expect higher pricing, it could slow down the acquisition of stressed assets. ARCs will have to find the pricing realistic," he said.