Allahabad Bank to clean up books before merger

Industry:    2019-12-05

Allahabad Bank Ltd will divest bad loans worth 922 crore as the state-run lender strives to clean up its balance sheet ahead of a merger with Indian Bank Ltd.

In a public notice on Wednesday, Allahabad Bank said it has identified 50 loan accounts for sale to asset reconstruction companies (ARCs), non-banking financial companies (NBFCs) and other financial institutions. The bank will, however, sell the non-performing assets (NPAs) only in exchange of cash and not security receipts, as is prevalent.

These assets form around 3% of Allahabad Bank’s total NPAs of 31,468 crore as on 30 September. In the September quarter, the bank made cash recoveries of 552 crore and upgraded loans of 620 crore from NPA to standard category. While it managed to reduce its bad loans by 1,398 crore in the quarter, it also added fresh NPAs of 4,162 crore in the same period.

“Offers/ bids are invited from the ARCs/NBFCs/FIs for single-asset/basket/portfolio basis and on cash basis. The bidding will be held on e-auction platform after completion of due diligence,” it said.

According to an Allahabad Bank official, who did not wish to be named, the bank wants to enter the merger process with a cleaner balance sheet and the sale of bad loans is a step towards that. He said Allahabad Bank, through the proposed sale, is looking to maximize bad loan recoveries by selling on a cash basis.

Among the list of 50 accounts are 34 loans of 1 crore and above. The highest is that of Rohit Ferro-Tech Ltd at 164.15 crore, followed by OCL Iron and Steel Ltd (OISL) at 139.77 crore. The outstandings are for the period ended 18 November.

Interestingly, lenders have tried quite a few debt restructuring methods to revive Rohit Ferro-Tech, starting with corporate debt restructuring (CDR) in 2014 and a strategic debt restructuring (SDR) in 2015, which was later withdrawn. Rohit Ferro-Tech produces stainless steel and ferro alloys, used in the production of steel. It has faced stress due to a slowdown in demand for steel products. As on 31 March 2019, it had a total debt of 2,689 crore.

“The company has incurred losses and has been facing liquidity crunch resulting into fall in capacity utilization and also from the prolonged shutdown of the Haldia Unit,” Rohit Ferro-Tech said in its FY19 annual report.

OISL produces steel billets and sponge iron at its plants in eastern India. It has tie-ups with the state government for iron ore and coal supply, and also has a 14MW captive power plant, according to its website. As on 31 March, the company had a total debt of 1,694.20 crore.

According to the merger plan announced by finance minister Nirmala Sitharaman in August, Indian Bank will be merged with Allahabad Bank to make India’s seventh-largest state-run bank with business of 8.08 trillion. This is part of the plan to combine 10 PSBs into four.

“The bank has not been very active in selling bad loans because of reasons that include the lack of appetite in the market for stressed assets. While there have been some sale in exchange of a mix of security receipts and cash, this time round, we want 100% cash to be paid upfront,” said the Allahabad Bank official cited above.

However, ARCs have always differed with banks’ view and believe that the reserve price set by lenders is the factor behind lack of sales. In a report by rating agency Crisil and industry lobby body Assocham in August, Siby Antony, chairman, Association of ARCs said, it is time the banks take a considered view of the appropriate resolution tool for maximizing value.

“ARCs will be ideal for many sectors like power, engineering, and those sectors or units where investor interest in likely to be low. The Reserve Bank of India (RBI), on its part, should revisit its regulation regarding sale of NPAs to ARCs, for ARCs to play a bigger role in resolution and maximization of value for banks,” said Antony.

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