Central Bank plans to buy Rs 30 billion of retail loans in next 4 months

While cost reduction and recoveries from bad loans was on top of their agenda, the bank also has to grow its loan book for more revenue, says Cenntral Bank MD

With Rs 220 billion in surplus money, state-owned Central Bank of India plans to buy loans to individuals (termed retail loans) up to Rs 30 billion in the remaining part of the current financial year.

State Bank of India (SBI), Union Bank, ICICI Bank and Axis Bank have all been active in buying retail loan portfolios from both non-bank finance corporations (NBFCs) and housing finance corporations (HFCs), both of which were in need of immediate liquidity. The markets faced a severe fund crunch since the defaults by IL&FS group entities.

In fact, SBI had jacked up its retail loan buy-back estimate from Rs 150 billion to Rs 450 billion. Union Bank indicated it would buy worth Rs 50 billion.

Vibhor Mittal, vice-president at ratings agency ICRA, says loan pool buying activity through direct assignment (purchase) and securitisation rose sharply last month to Rs 180 billion. 

The normal monthly volumes has been about Rs 70 billion. This month has also seen elevated activity in this regard but perhaps not as much as in October, with liquidity in the market having improved. Rolling over of commercial paper and issuances have been smooth, said Mittal.

Pallab Mahapatra, managing director at Central Bank, said while cost reduction and recoveries from bad loans was on top of their agenda, the bank also has to grow its loan book for more revenue. It has a liquidity surplus of Rs 220 billion and will use some of this to acquire retail loan pools, from NBFCs and HFCs. To be done after "stringent assessment" of the quality, he added.

The Mumbai-based lender happens to be under the 'Prompt Corrective Action' (PCA) regime of the Reserve Bank, due to a higher level of non-performing loans. 

The regime puts restrictions on lending, even as the bank faces the burden of provisions for bad loans and subdued income growth. Advances shrank from Rs 1.66 trillion in September 2017 to Rs 1.52 trillion in September 2018.

Analysts said the liquidity challenge for some NBFCs and HFCs were an opportunity for banks with extra funds to acquire better yielding assets. Central Bank had a net loss of about Rs 9.2 billion in the September quarter, as against one of Rs 7.5 billion in the year-ago period. Sequentially, the net loss declined from Rs 15.2 billion in the June quarter, the first one of this financial year.

Total income also fell in the September quarter, to around Rs 62 billion, from almost Rs 69 billion a year before.

Its asset quality has been under pressure, with gross non-performing assets (NPAs) at 21.48 per cent of advances in September, as compared with 17.27 per cent a year ago. Mahapatra says net NPAs (after making the provisioning) have declined and the provision coverage ratio (PCR) has shown improvement. 

Net NPAs declined to 10.36 per cent at end-September, from 10.58 per cent in end-June. They were at 9.53 per cent at the end of September last year.

Overall provisions and contingencies, however, moved up to a little over Rs 19.8 billion; it was Rs 19.6 billion at end-September 2017. The PCR at end-September was 67.7 per cent, up from nearly 58.6 per cent a year before.

A loan buying opportunity

• Banks with surplus cash step up retail pool buying
• Interest rates rise, giving bank good yield
• October loan purchases touch Rs 180 bn
• Central Bank's retail loans 27% of advances in March 2018
• Central Bank has surplus funds of Rs 220 bn