The Hindu Business Line : PSU banks see potential in bad loans, plan asset reconstruction cos

On the books
With Basel II norms banks’ need for capital would increase.
This could prompt many banks to take the bad assets off their balance sheets.

Priya Nair

Mumbai, Dec. 23 Some of the public sector banks that have largely been sellers of bad loans are now considering buying such assets, sensing the business potential this market can offer.

A senior official from State Bank of India said that the bank has, in principle, decided to purchase assets and could start the process by April next year. “We have agreed in principle to start aggregating debt. We could either invest in them or try to sell to other asset reconstruction companies.”

While the bank is not focused on any particular industry, it would enter only those sectors where it already has an exposure, the official added. “We have to be careful as we cannot end up with additional NPAs on our books,” he said.

To pay for the assets, SBI plans to pay part cash and issue bonds for the rest of the amount. These bonds are tradable in the market. “Being a public sector bank our bonds will attract investor interest. So, there will be no outgo for some time from our side,” the official added.

Basel norms

With Basel II norms kicking off from March 2008 for banks like SBI, which have overseas operations, banks’ need for capital would increase. As banks will have to make higher provision for unrated loans, their risk weight will be higher and they will need more capital. This could prompt many banks to take the bad assets off their balance sheets.

The next stage for SBI could be setting up an asset reconstruction company, but the process could take up to a year. SBI already has 19.95 per cent stake in Asset Reconstruction Company of India Ltd (ARCIL). The eventual plan is to hive off all bad assets of SBI and its associates to the ARC, in order to have a separate ‘bad’ bank. This will make the recovery process more efficient, said the official.

Going ahead, this could be an additional stream of income for banks, said an official from Union Bank of India. The bank is jointly sponsoring an ARC with Yes Bank, Bank of India, Bank of Baroda and JP Morgan. The ARC has got approval from the RBI and is likely to start operations beginning next fiscal, the official said.

“There is good business opportunity in buying stressed assets, as the NPA portfolio in the country in absolute terms is quite large,” he said.

Some other ARCs that have got approval from the RBI include ASREC, which is sponsored by UTI-I and has Bank of India, Allahabad Bank and Indian Bank as shareholders and Ace, an ARC promoted by IFCI and Punjab National Bank.

SIDBI also recently announced plans to set up an ARC jointly with other banks, which would focus on the SME sector.