Banks rush to sell bad loans post RBI diktat

The Reserve Bank of India's insistence that banks must provide for 70% of all their bad loans and that they need to reach that 70% mark by September is giving an impetus to the bad loan market. Banks have become more aggressive in selling off their bad loans to asset reconstruction companies, reports CNBC-TV18's Gopika Gopakumar.

Sale of bad loans is a regular feature in the banking industry. However, what is different this year is that banks are looking to sell substandard loans or the ones which are on the verge of turning bad. Banks usually set aside 10% of their loan value as provision for these substandard loans. For bad assets they set aside nearly 100% of the loan value.

However, with RBI's new provision rules, they have removed the distinction and banks have to keep 70% for all default loans. This reduces the profits especially for those banks who have a low coverage ratio. Banks like Indian Overseas Bank with a low provision coverage ratio are hence looking to sell off these substandard loans. This is bound to trim the provisions and also improve their profits.

Going ahead, this would also give them better pricing compared to bad loans, which are difficult to recover. But asset reconstruction companies say that they are ready to quote only 20-30% of the loan value for such loans.