Private lender IndusInd Bank plans to sell nearly Rs 1,500 crore worth of bad loans, including more than 1 million micro loans with a ticket size anywhere between Rs 5,000 and Rs 40,000, to asset reconstruction companies (ARCs), in a bid to arrest deterioration in its asset quality.
According to a source, the bank has nearly 1.06 million micro loan accounts of farmers spread across the country and is looking to transfer them under the all-cash deal.
The proposed sale of stressed assets comes after the private lender announced nearly 40% fall in its net profit due to an increase in provisions in the second quarter of the current financial year. The bank witnessed deterioration in its asset quality as its gross non-performing asset (NPA) ratio increased to 2.11% of gross advances as on September 30 as against 2.02% as on June 30, 2024, and net NPAs rose to 0.64 % from 0.60%.
The sale of stressed assets – the biggest for the bank in the current financial year – will help the lender reduce bad loans in its books.
“It is a 100% cash deal…and the bank will not accept SRs (security receipts) for this transaction,” the source added.
ARCs are allowed to buy bad loans by issuing SRs, which are tradable instruments and entitle the holder to a share in the recovery from these stressed assets. The recovery in case of unsecured loans ranges between 8% and 12%. In case of secured assets, the recovery can go up to 50%.
During a recent earnings call, the bank management had acknowledged the rising stress in MFI loans. “There is stress which are emerging in some parts of the country, specifically Bihar, Maharashtra, Odisha, parts of North. So, you have to continuously wait and watch on this,” Sumant Kathpalia, managing director and CEO of IndusInd Bank, had said in the earnings call on October 24. “We are cautiously optimistic on the microfinance. We like this business. We believe that this business will turn around once the disbursement growth resumes,” he said.
There is a growing trend in the banking sector to approach ARCs to increase recovery from bad loans by selling stressed assets to them. Last month, Ujjivan Small Finance Bank informed stock exchanges that it was planning to sell Rs 270 crore worth of non-performing and written-off micro-banking loans to ARCs.