Global Investors Say Lower Prices on Indian Stressed Debt Neededby
Nation’s lenders need more provisions to sell loans, SSG says
SC Lowy sees more opportunities in loans sold by foreign banks
Global investors in distressed debt are calling for Indian lenders to sell loans at lower prices, indicating that more pain lies ahead for the nation’s embattled institutions.
SSG Capital Management (HK) Ltd. said that there is a pricing gap that needs to narrow before more transactions can take place. SC Lowy, an independent fixed-income firm, sees bigger opportunities buying stressed Indian loans from foreign lenders as they are willing to accept deeper discounts than their Indian peers.
The outlook is bad news for Indian banks that are battling over $100 billion of stressed assets. The nation’s lenders are faced with a delicate balancing act: They need to make more provisions against bad loans, which will further hurt their profitability and put them in danger of breaching capital adequacy ratios. But unless they can offer lower prices, they may not see takers for their soured debt.
“The fact that Indian banks are willing to actually recognize loans as non-performing is a huge and remarkable start,” said Edwin Wong, chief investment officer at Hong Kong-based SSG Capital. “But whether the provisions that they made are large enough to allow a sale of loans, there’s probably some more room to go.”
“As problem loans continue to rise, there is a real risk that certain state banks could breach capital adequacy requirements,” said Mihir Chandra, head of research for Asia at SC Lowy, adding that the government needs to push ahead with recapitalizing the banking sector.
SC Lowy bought Vedanta Resources’ dollar loans earlier this year, Chandra said. The firm expects Indian banks to eventually sell loans and be more “realistic” about pricing but said that will take time as they have not made enough provisions.
India’s state-owned lenders had top-tier capital equivalent to 11.6 percent of their risk-weighted assets as of March 31, lower than the 13.2 percent for the banking system as a whole. While the government last week injected $3.4 billion of capital into the state-owned banks, Fitch Ratings estimates that lenders need $90 billion in total additional capital to meet Basel III requirements by 2019.
Getting enough capital could prove challenging, according to Nicholas Yap, a credit strategist at MUFG Securities Asia. “The Indian government is constrained in its ability to adequately recapitalize the banking system given its high fiscal deficits,” he said.
Indian lenders can transfer their bad loans to so-called asset reconstruction companies. Such transfers have largely been in the form of security receipts rather than in cash. Increasingly, the government has been pushing for the deals to be done at market-driven prices rather than through paper transfers.
Under Reserve Bank of India rules effective August 2014, asset reconstruction companies must triple the amount of their own money they use when buying soured debt to at least 15 percent of the price. “That’s a great step forward as it forces the market to put a real price to the bad loan sales,” said Wong at SSG Capital, which owns a 49 percent stake in Asset Care & Reconstruction Enterprise, an Indian asset reconstruction firm.
SC Lowy sees opportunities to invest in the steel and power sectors, which face high levels of stress. As the government restructures electricity distribution companies, it should lead to a pick-up in power prices and improved valuations, the firm said. SSG Capital said that banks remain under-capitalized so the need for alternative capital is huge.
India’s overhaul of its bankruptcy code was also an encouraging development for global investors as it improves creditor protections. Parliament passed a law in May calling for the creation of a Bankruptcy Board, which will regulate a new class of insolvency professionals.
“India remains one of the most lucrative markets in the stressed space, particularly given the high level of non-performing loans and the recent changes in bankruptcy laws,” SC Lowy’s Chandra said.