Banks line up retail NPA sales as stress rises

A number of banks have lined up sales of distressed retail loan portfolios with bad loans in the segment expected to rise, sources told CNBC-TV18.

“Usually it is more corporate loans, especially legacy accounts, that we’ve seen banks selling to ARCs etc, but now we are seeing many banks trying to seek retail pools,” said a senior executive from an asset reconstruction company.

This person added that retail portfolio sales are expected to pick up especially after banks start classifying some of these accounts as non-performing assets or NPAs once the Supreme Court order is vacated.

In September last year, while hearing the interest waiver case, the Supreme Court temporarily barred banks from classifying loans that were standard as on August 31, 2020, when the six-month moratorium ended, as NPAs until a ruling was passed in the matter. Thus, several accounts that would have slipped into bad loans, have been artificially kept as standard in banks’ books. The order is expected to be lifted in January, and retail NPAs may spike after that, which would prompt more sales, explained another banker from a private bank.

As per two people in the know, the country’s largest private sector lender HDFC Bank recently concluded the sale of almost Rs 2,000 crore of retail/SME loans. ICICI Bank is also mulling the sale of about Rs 1,000 crore of retail loans to asset reconstruction companies (ARCs) or other financial institutions (FIs), CNBC-TV18 has learnt.

Bank of Baroda is also looking to sell approximately Rs 500 crore of retail loans, as is Indian Bank, added people in the know. Among others, IDBI Bank and L&T Finance may also sell smaller portfolios of Rs 100-200 crore of retail loans, added one of the people quoted earlier.

In response to CNBC-TV18's query, an ICICI Bank spokesperson said, "Your information is incorrect."

Typically, bad loan sales by banks gather steam in the second half of the year, especially in the last quarter as the financial year draws to a close. With retail stress rising, more banks are expected to explore similar distressed asset sales, said a senior public sector banker.

"Given the uncertainty induced by COVID-19 and its real economic impact, the asset quality of the banking system may deteriorate sharply, going forward,” the Reserve Bank warned in the Report on Trend and Progress of Banking in India 2019-20, released recently.

"The modest GNPA ratio of 7.5 percent at end-September 2020 veils the strong undercurrent of slippage,” the RBI said in the report. RBI found that the addition of NPAs would have been higher by 10-66 basis points had it not been for the Supreme Court order preventing them from tagging accounts as NPAs.