SBI aims to cut bad debt with huge online property auction

The bank will sell its repossessed flats, warehouses and offices worth a total of nearly Rs 1,255 crore

India’s largest public sector lender will hold a record online auction this weekend, to sell repossessed flats, warehouses and offices worth $200 million (Rs 1250.2 crore) as it seeks to chip away at the $10 billion (Rs 62,510 crore) mountain of bad debt.

The State Bank of India (SBI) auction will be the biggest nationwide online sale to date, and  a rare public move to turn distressed loans into ready cash.It comes weeks ahead of rule changes, that will force banks to take on much larger provisions for such loans, with what were previously labelled as restructured debts being reclassified in accounts as bad debt.

Including both bad and restructured debt, more than a tenth of bank loans have soured. India Ratings and Research, part of the Fitch agency, estimates impaired loans could hit 13 per cent of the total by March next year.

This has left debt-burdened banks scrambling for cash, even resorting to flash sales of repossessed properties that on their own can be worth as little as a few thousand dollars.

“We are now a lot more aggressive,” said Parveen Kumar Malhotra, a deputy managing director at SBI, who leads a special unit managing stressed assets.

“We are in a better position to do all the things required, from (phone) calls to auctions and everything in between, including legal cases.”

Under pressure

India's state-owned banks have all have experienced a jump in bad loans over the past two years as borrowers, particularly companies, struggled to service loans when the economy slowed.

With less cash from the government and new global prudential rules on the horizon, Indian banks are under increased pressure to clean up their balance sheets.

SBI's sale pulls together more than 300 pieces of property from two dozen Indian cities in what its advertising described as a "mega e-auction" of prime commercial and residential properties, many of which were put up as collateral by fledgling entrepreneurs.

Efforts by Indian banks to claw back bad debt have been complicated by the country's lack of a bankruptcy code. Reserve Bank data shows that, as of March last year, Indian lenders had received only 16% of the value of loans they had sought to recover through tribunals.

SBI itself was involved in one of the most high-profile cases in recent years after the collapse of Kingfisher Airlines, which still owes banks $1.5 billion. Creditors, led by SBI, took possession of Kingfisher offices in Mumbai last month after trying for almost two years.

Overseas, options for banks have included packaging the loans and selling them to other businesses that will seek to recover the cash. But such sales in India were badly hit after rules tripled the upfront payment for buyers of bad debt.