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Bad loan sales hit rough patch

December 11, 2008 10:46 IST

A liquidity crisis and a fall in real estate prices have slowed down sale of non-performing assets in the current financial year.

The slowdown coincides with rising loan defaults by retail customers and small enterprises, which have been hit by a steep rise in lending rates.

The resource scarcity has changed the priority of investors. They want to remain liquid and not commit their funds to the long term.

"There is a decline in the amount of resources that will be committed for buying bad loans due to tight liquidity conditions in the financial system," said P Rudran, chief managing director and chief executive, India SME Asset Reconstruction Company.

The resources may be available with investors, including international players.

But priorities have changed for financial sector players as the meltdown and the subsequent fund crunch have intensified, especially after September 15.

An investment banker said, "The priority is to remain liquid when the resource crunch remains an issue in the global market.

In the domestic market, though  liquidity is comfortable, there is uncertainty about committing resources for the long term."

He said another six months will remain difficult since there is still no clarity about when liquidity conditions will improve for hedge and vulture funds to commit money to buy distressed assets.

Another factor that has hit the pace of NPA sales is a drop in land prices. The price of land for a house or an industrial unit has declined considerably in 2008.

This reduces the chances of resolution of NPA accounts, adversely impacting activity, a senior State Bank of India executive said.

Rudran added: "Many projects were financed at a time when asset prices were high. Now, with a turn in the economic cycle, chances of getting value from NPA accounts, which have land as collateral, have declined.

The correction (read a further drop in prices) in land and asset prices is expected to stay in force in 2009. So even if liquidity improves, assets, a key factor in resolution of NPA accounts, will remain adverse, making investors cautious in committing funds to asset reconstruction companies.

IDBI deputy managing director Jitendra Balakrishnan said while it was true that resource constraint and land prices had impacted sale of NPAs, there was also another factor behind the moderation in pace.

Banks have offloaded a substantial chunk of bad assets over the last 2-3 years, bringing down their level of NPAs in percentage terms over the period.

Abhijit Lele in Mumbai
Source: