Why do banks sell
Banks are looking to sell retail bad debt to CRAs as it is difficult to have a centralized collection strategy for these accounts. Since retail accounts are typically managed by branch managers, banks have a harder time overseeing the collection process from headquarters, the first of the three anonymous managers cited above said.
The head of personal loans at a large private bank, while speaking on condition of anonymity, said the “bounce rate” for a good quality book would generally be in the range of 5-10%. . As such, the collections team, whether internal or an agency employed outside the bank, is prepared to handle collections to this extent. As Covid-19 hit and ‘bounce rates’ increased, collection capacity began to stall, which would have prompted some banks to move closer to ARCs.
This banker said that as a general rule, banks tend to sell old NPAs to CRAs, after they have exhausted their recovery measures. However, the current crisis has led to an emphasis on collections, which may have prompted more recent bad debt to be sold at a lower discount.
According to CRA officials cited above, secured business assets, especially home loans and mortgages, are discounted between 40% and 60% of the loan value, depending on the age of the loan. Unsecured loans typically see their book value reduced by 80-90% when sold to CRAs.
Not all CRAs are interested
While retail loan sales have increased, not all CRAs are interested in purchasing these assets.
First Indian CRA, Arcil is one of the biggest buyers of these assets. Phoenix ARC and other small businesses are also evaluating retail loan portfolios for sale, the above people said.
The lack of appetite for retail accounts is largely due to the fact that collecting these loans is a tedious endeavor, which requires a special skill set. “We have built an in-house team of experts who use data analytics and a targeted recovery approach, which helps increase retail account recoveries,” said Sahoo d’Arcil.
“We are seeing retail APNs being offered for sale by both private and public sector banks. Previously, retail sales were more sporadic and in recent months there has been a 30-40% increase in shares on retail sales by banks. We could see a lot more deals happening this year, ”said Sanjay Tibrewala, CEO of Phoenix ARC.
Additionally, while troubled lenders, such as Dewan Housing Finance Corp. Ltd., Reliance Commercial Finance Ltd. and Reliance Home Finance Ltd. foresee a change of ownership in the coming months, another group of struggling personal and small business loans could emerge. for sale.
“New owners of stressed NBFCs would prefer not to waste time resolving old NPAs and would like to start operations with a cleaner book,” said Vinayak Bahuguna, former CEO of Arcil.
According to data available in the latest edition of the RBI Banking Industry Trends and Progress Report, the book value of outstanding loans sold to CRAs in March 2020 stood at Rs 4.31 lakh crore, up 13. 7% year on year. Against these loans, ARCs issued guarantee receipts worth Rs 1.5 lakh crore.
Although no current estimate is available, a report by Crisil Ltd. in August 2019 had estimated that the share of retail assets in total assets purchased by CRAs was 5% in March 2019. Business loan accounts made up 70% of assets, while small and medium-sized businesses contributed 15%, the remainder going to agriculture loans.