Banks brace to offload bad loans

With the year-end approaching commercial banks are scurrying to present squeaky clean balance sheets.

The country's largest banks, the State Bank of India and ICICI Bank are both readying to palm off Rs 1,500 crore (Rs 15 billion) worth of bad loans each to the Asset Reconstruction Company of India Ltd.

Discussions are in advanced stages and the sale is expected to take place soon, said sources close to the development.

With the sale ICICI Bank would bid adieu to its legacy bad loans inherited post the bank's reverse merger with its parent in March 2002.

ICICI Bank's net NPA ratio as a per cent of net advances is expected to come down to as low as 0.50 per cent by March end.

SBI aims to bring its net NPA ratio down to 2 per cent by March 2005 down from 3.48 per cent in the previous fiscal.

Other banks and institutions that are likely to carry out a sale of bad assets to Arcil -- the only asset reconstruction company in India that has started purchasing bad assets -- are Canara Bank of about Rs 175-250 crore (Rs 1.75-2.5 billion), Punjab National Bank and the Industrial Finance Corporation of India, said sources.

Arcil has already completed acquiring assets worth Rs 13,000 crore (Rs 130 billion) this fiscal and may cross Rs 15,000 crore (Rs 150 billion) before the year closes.

Arcil's earlier target had been set at Rs 20,000 crore (Rs 200 billion) which was subsequently scaled down to Rs 15,000 crore due to several roadblocks that the institution has been facing on the front of foreign investment and prohibitively high stamp duty costs in certain states of the country.

Many banks in the country are very apprehensive of selling assets to Arcil since the body buys assets at deep discounts.

"Arcil is offering to buy our bad assets at 70-80 per cent discount to the outstanding loan amount. Plus there is no guarantee that we will get any significant returns from these accounts in future. We feel that if we keep the assets in our books we will be able to recover more money from the borrowers," said the general manager in a public sector bank.

Bankers are of the firm view that once more players like Asrec and Actis enter into the asset reconstruction business, competition will force asset reconstruction companies to acquire bad loans at better valuations.