BoI, Union Bank and PNB could make the most of the bad bank

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Mumbai: The National Asset Reconstruction Company (NARCL) will have maximum impact on the loan portfolios of Bank of India (BoI), Union Bank and Punjab National Bank (PNB), which will sell more than 1% of their loans to the bad bank. According to the credit rating agency Crisil, the bad bank, or NARCL, will reduce the banks’ NPA level by 20-25% over time.
However, the immediate impact on the bottom line will be limited, as the lenders who sell loans in the first phase will receive an upfront cash payment of around Rs 2,700 crore compared to the Rs 90,000 crore of bad debts that ‘they sell to the company. In addition, investing in security receipts issued by NARCL will not increase the capital requirement of banks due to the government guarantee.
Of the Rs 2 million bad debt to be transferred to NARCL, around Rs 30,600 crore will be guaranteed for five years. NARCL will pay 15% of the amount at which the loans are appraised, in cash. The remaining 85% will be paid using security receipts. According to a Jefferies report, the government guarantee will keep the safety capital neutral because without the guarantee, banks will have to set aside funds for provisions. A risk-free sovereign guarantee does not attract similar capital requirements.
“For the guaranteed part, the banks will recognize the value as an investment but this will not require any capital for 5 years because there is a government guarantee. For the unsecured part, banks might not recognize the value until actual collection is made, ”the Jefferies report said.
According to the report, from the first batch, SBI will transfer most of the loans at Rs 20,000 crore. However, given the size, the sale will only represent 0.8% of its loan portfolio. While BoI, Union Bank and PNB will sell much less at Rs 5,500 crore, Rs 7,800 crore and Rs 8,000 crore, their loans will represent a much larger portion of their balance sheet. For the BoI, the loans sold will represent 1.5% of its portfolio, 1.3% for Union Bank and 1.2% for PNB, Jefferies said.
“The sovereign guarantee will protect investors in debt securities against potential lower recoveries. This in turn could potentially enable the development of a secondary market for securities receipts, which has so far proved elusive, ”said Crisil Senior Director and Deputy Rating Director Krishnan Sitaraman.
The loans sold to the wrong bank include an exposure of Rs 22,500 crore to Videocon Oil Ventures, where SBI is the main bank. Another important account is the Amtek Auto account run by Union Bank, which has 9,014 crore in bank loans. IDBI is the main banker for three major accounts: Reliance Naval, Jaypee Infra and GTL.


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