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Rewrite of failed retail loans soon to go on sale

MUMBAI : Lenders plan to sell a pool of unsecured personal loans that have defaulted after the end of the moratorium on repayments for borrowers hit by the pandemic, said three people aware of the development.

Many banks have entered into informal discussions with Asset Reconstruction Companies (ARCs) to sell some of these unsecured loans to clean up their balance sheets and free up capital for lending, the people above said.

The loans that banks are selling have been restructured under the Reserve Bank of India’s Covid-Recast Frameworks I and II, gradually exiting the moratorium by June 2023. But analysts believe at least half of retail loans being recast have already exited their respective moratoriums, while the rest will end their moratorium period in the coming quarters. Certainly not all would go bad.

“We estimate that half of all retail loans that have exited the moratorium in mid-sized banks so far are past due. However, these borrowers are not affected by the third wave, but have yet to recover from the impact of the first two waves, despite various supportive measures,” said one of the people quoted above.

The high default rate suggests a large chunk of borrowers are still feeling the pain caused by Covid-related lockdowns as millions of Indians saw their jobs lost or their incomes collapse. Unsecured loans offer banks higher returns but are more vulnerable to adverse events and external shocks. But given the lack of collateral, lenders have little recourse if borrowers default.

The person said the discrepancies are mostly seen among banks that are offering lenient credit rewrites.

“Most banks’ comment – no more than 20% of the rewrite will go bad – seems a little optimistic given the slippage numbers already visible,” the person said.

Banks have restructured loans overall 1 trillion under the first window and 1.19 trillion below the second window, data from rating agency Icra showed. While 60% of the first window was corporate, the second was offered exclusively to retail and small business borrowers.

Wealth reconstruction firm executives said they see some of these personal loans for sale. “As people have lost their jobs and businesses, some of these (retail) cases are coming along,” said RK Bansal, managing director and CEO of Edelweiss ARC.

According to Pallav Mohapatra, Chief Executive, Asset Reconstruction Company (India) Ltd, some banks are discussing such sales with asset reconstruction companies. “Some of the banks will try to get these loans back over time, but those who want to clean up their balance sheets immediately would sell them to ARCs. See, ARCs wouldn’t buy them at book value, they would buy them at a discount, and lenders will weigh the benefits of selling at a discount against the benefit of keeping such assets,” Mohapatra said, adding that private banks would rather sell these loans than theirs state counterparts.

On Jan. 6, Icra said that since the slippage rate and repayment rate for private banks are much higher than for public sector lenders, this may mean the moratorium period offered by public banks is likely to be longer than that of their counterparts from the private sector. “As banks have restructured most of these loans with a moratorium of up to 12 months, this book is likely to exit the moratorium beginning in Q4 FY22 and Q1 FY23,” said Anil Gupta, Vice President (Financial Sector -Ratings) by Icra Ratings in the January 6 note.

Non-bank lenders have also joined the fray after the Nov. 12 RBI circular sought to bring their asset classification norms on par with banks by March 31, a move that analysts say will result in more non-bank non-performing loans -financial company would lead. However, the regulator has now extended the deadline by six months to September at the request of industry associations.

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Tags : personal loansunsecured loans
Richard Dement

The author Richard Dement