Indian Bank bad loan sell off

Banking is a core interest of mine ( I offer a second year elective on banking at IIMA), so this blog, you will have noticed, contains posts on banking every now and then.

ET reports that Indian Bank plans to sell off all its remaining bad loans worth Rs 1500 crore at one shot. They will be sold through an action. Three asset reconstruction companies (ARCs) have bid for the portfolio. This is the biggest bad loan sale in Indian banking.

Why does it merit attention? Because Indian Bank had thus far relied on its own recovery cell to chase defaulting borrowers and has had commendable success. The bank was regarded as a basket case not long ago but it has made a remarkable turnaround and successfully launched its IPO a few months ago. The IPO trades at a premium now of nearly 30% to its issue price.

So why would India Bank want to sell its assets to ARCs instead of making recoveries itself? I can think of two reasons. The ARCs have become good at their job and hence can offer an attractive price for the bad loans- a better price than Indian Bank can hope to recover. ARCs can offer to pay a certain fixed amount plus a certain percentage of the amount actually recovered. Let's say an ARC offers to pay a fixed amount of Rs 500 crore for the Rs 1500 crore portfolio. It can offer to pay another 10% on the amount recovered. If the amount recovered is, say, Rs 800 crore, Indian Bank will get another Rs 80 crore.

Two, the bad loan book ties up people and this may not be worth it unless the amount recoverable is really large. Indian Bank expects the sale to free 250 people from its recovery unit. They will be used for marketing products. Presumably, with bank business booming, Indian Bank has figured this is a better way to use the people than to have them chase bad loans.