Standard Chartered starts discussions with potential investors to sell loans in the backdrop of an increase in stressed assets
Mumbai: Standard Chartered Plc. will sell over $1 billion in loans from its India book as it seeks to clean up its loan portfolio, said three people familiar with the development. The bank has started discussions with potential investors, the people added.
Bloomberg News reported on Monday morning that Standard Chartered will sell nearly $4.4 billion in loans across its Asia portfolio, including loans in India.
The UK-based bank’s decision comes against the backdrop of an increase in stressed assets. On 23 February, the bank reported a loss of $981 million from its India operations, while loan impairments, including restructured loans, across its India portfolio surged almost eightfold to $1.3 billion in 2015 from $171 million in 2014. Overall, the UK-based lender’s loan impairments surged to $4 billion in 2015 from $2.14 billion in 2014. As of June 2015, Standard Chartered had a gross non-performing assets ratio of 9.07%, according to disclosures made by the bank.
“The bank was earlier looking to sell the entire portfolio but after seeing that there isn’t much demand, it has decided to sell individual assets which includes both external commercial borrowings and local loans,” said one of the three people, adding that conversations are underway with large global funds that are looking to invest in stressed assets in India. He spoke on condition of anonymity as the talks are confidential.
The second person (who also asked not to be identified) confirmed that more than $1 billion in loans are on sale from the bank’s India portfolio.
“We said in November when we announced our strategic review that we would be aligning our risk profile to the new strategy, and confirmed then that the Group had identified a number of exposures for liquidation that exceeded the new risk tolerance levels. While we don’t comment on individual clients, we are making good progress on executing our strategy, and we will provide an update to our investors in due course,” a spokesperson for Standard Chartered India said in an e-mail.
Talks have begun with firms such as CPPIB (Canada Pension Plan Investment Board), KKR India and SSG Capital Management Ltd, said the first person.
A CPPIB spokesperson declined to comment while an SSG Capital Management spokesperson did not respond to an e-mail seeking comment. Sanjay Nayar, chief executive officer (CEO) of KKR India, declined to comment.
Standard Chartered, one of the most active foreign banks in lending to Indian firms, saw bad loans surge due to its exposure to sectors such as infrastructure where projects were significantly delayed on account of financial, regulatory, or environmental issues.
In an interview in December, Ajay Kanwal, regional CEO of Asean and South Asia at Standard Chartered, acknowledged that over-concentration was an issue in the bank’s India portfolio and that it was trying to correct that. In November, Bloomberg reported that about $5 billion in advances that Standard Chartered made to Indian borrowers had been internally classified as being at risk of default. This includes the $2.5 billion that Standard Chartered loaned to the Essar group.
According to the third person, among the loans that the bank is looking to sell are those given to the Essar group. The bank is also looking to sell some loans in the engineering, procurement and construction (EPC) segment.
An Essar spokesperson said the group would not be able to respond immediately and sought time till Tuesday.
According to the bank’s Basel III disclosures, as of June 2015, over 12% of advances were tied to the infrastructure sector, including companies in businesses such as communication, electricity generation and roads. The bank also had roughly 6% of its book tied to the metal sector which has been experiencing stress due to falling metal prices and rising imports.
“Impairments increased significantly, primarily driven by exposures to commodities and India, where corporates were impacted by continued stress on their balance sheets, coupled with a more challenging refinancing environment,” the bank said in its earnings report in February.
Satish Gupta, managing partner, Vertex Capital Partners, a distressed asset advisory firm, said selling company-specific exposure may get a better response than attempts to sell a large chunk of loans together.
“Investors would like to focus on turning around a distressed company by acquiring and aggregating debt from various lenders with an aim to restructure and recapitalize the business,” said Gupta.
He added that a portfolio approach (where a chunk of loans is sold) involves buying debt of companies from different industries, making it difficult for the buyer to focus on reviving one particular company.
Investors that buy portfolios usually value a loan on the basis of what they are likely to get if they strip and sell the assets of the lender as opposed to a turnaround. “Banks therefore get higher valuations by selling large exposures as separate individual cases rather than in portfolios,” Gupta added.
Standard Chartered is not the only bank trying to clean up its loan book. Gross bad loans across India’s 39 listed banks surged to Rs.4.38 trillion for the quarter ended 31 December from Rs.3.4 trillion at the end of September, shows data collated by Capitaline, a financial database. Bad loans increased after the Reserve Bank of India asked banks to recognize bad assets and set aside money to cover the risk of default by March 2017.
A majority of these bad loans have come from the corporate sector, where credit quality continues to remain weak.
India’s largest rating agency Crisil downgraded debt worthRs.3.8 trillion in the last financial year—the highest amount of downgrades in any year. The rating agency expects credit quality for India companies to remain under pressure in the near term.
“Debt of firms downgraded by Crisil in fiscal 2016 has risen to an all-time high of Rs.3.8 trillion, underscoring that credit quality pressures continue to mount for India Inc,” said Crisil in a 4 April report.
A CARE Ratings’ Debt Quality Index published last week showed that credit quality of debt continued to decline.