High rates fuel home loan defaults

Asset Reconstruction Companies See More Increase In Banks’ Bad Debts

Defaults on housing loans are said to be on the rise, with individuals facing the brunt of the high interest rate regime. An indicator of this is the fact that of the total security receipts (SRs) of Rs 1,100 crore issued by Asset Reconstruction Company (India) Ltd (Arcil) to banks between April and September 2008 for acquiring bad loans , 20% were from home loan defaults.
Asset Reconstruction Companies (ARCs) expect a further jump in home loan defaults in the coming quarters if interest rates do not come down. S Khasnobis, managing director & CEO, said: “The retail loans, mainly housing loan default, form about 20% of the total SRs of Rs 1,100 crore issued by Arcil between April-September 08. The portion of Arcil’s acquisition comprising retail loans is likely to rise given the current environment.’’
When an ARC acquires bad debts from a bank, based on a valuation they either pay cash or issue SRs which are held in a trust and redeemed after realisation of the assets. Arcil, which is pioneer in acquiring distressed assets, had acquired these bad loans in question from around 20 banks. While details of individual banks is not available, it is learnt that ICICI Bank’s portion of the total SRs issued by Arcil was about 30%.
According to ICICI Bank, the total value of delinquent loans sold by the bank to Arcil April 2008 onwards stands at Rs 608 crore for a sale consideration in excess of 62% of the gross loan book. However, it is not known what portion of this comprises retail loan defaults.
According to an ICICI Bank spokesman: “Sale of retail NPAs has been one of the many tools adopted by the bank to proactively manage delinquencies in the portfolio. It is a standard activity undertaken in the normal course of business by all international banks. Sometimes the sale is conducted every quarter. Also, this is only a very small portion in the overall delinquency management strategy of the bank.’’NPAs have an adverse impact on shareholders’ value of banks and financial institutions by eroding margins. ARCs acquire distressed assets at a discount depending on the credit realisation potential of the asset.
An industry expert said that banks would increasingly use ARCs to hive off their distressed retail assets so that they are not required to sully their hands in dealing with bad retail loans.
An official from a newly floated ARC said that even though bad retail assets offers a huge opportunity, it requires the right machinery (read, people) to gain monetary realisation from such assets.Since inception (August 2003), Arcil has acquired total distress debt including overdue interest of over Rs 40,000 crore at an average valuation of 25%. SRs issued were approximately Rs 10,000 crore since inception.
So far, Arcil has already resolved 65% of the non performing loans acquired so far and have recovered and distributed about Rs 2,800 crore to all the SR investors.