ICICI Bank, the country's second largest commercial bank, will auction Rs 1,500 crore (Rs 15 billion) worth of non-performing assets this month. The first auction of "bad loans" in India could trigger similar deals by other banks and financial institutions like the State Bank of India and HSBC, banking sources said.
PricewaterhouseCoopers (PwC) will conduct the auction where global investors can participate online. There will be a pool of 300-350 bad loans of Rs 1,500 crore and banks and institutional investors can bid individually or through a consortium. Information on bidding will be available from September 26, and transactions will close before December.
Banks are taking the direct route to sell bad loans instead of going through an asset reconstruction fund as they can get cash upfront here, while the ARCs offer security receipts that are encashed after assets are sold.
"The auction will offer a better price discovery mechanism," said PwC sources. This auction has been facilitated by the Reserve Bank of India's July guidelines on the purchase of bad loans by banks and non-banking finance companies. Internationally, bad loans are auctioned at a 70-80 per cent discount to their prices.
Potential investors found large loan portfolios attractive as this provided them a sustainable business model in India on a medium to long-term basis, said Ashwani Puri, lead partner, business recovery services-India, PwC.
The global consultant has undertaken over 100 portfolio advisories for clients across Asia and Europe. PwC was also retained by the government and the Asian Development Bank to develop an enabling framework for effective functioning of asset reconstruction companies in India.
"A range of factors have aligned to make this the ideal time to dispose of ICICI's stock of bad loans ," said David Edmonds, PwC's lead partner for global distressed debt services. Apart from domestic interest, many foreign entities are keen to pick up bad loans of banks.
"There is a growing foreign investor interest in the Indian distressed debt market and if you add to this the common view that the medium- to long-term prospects for India are looking good, then we can expect strong interest in the sale," Edmonds said.
At the same time, other senior PwC executives said India's legal framework and the fact that a single borrower had several lenders, did make the Indian scene different from other markets.
"The ICICI management is looking to capitalise on emerging opportunities in the Indian banking market and no longer wishes to be saddled with the ongoing burden of managing under-performing loans," said Puri.
