Bandhan Bank had some bad loans in its microfinance business, which were mostly unsecured microfinance loans with no collateral such as property or gold backing them. The borrowers had failed to make repayments for more than 180 days, leading these loans to be classified as bad loans.

The total value of these bad loans was ₹3,212 crore. To improve its financial records and reduce risk, the bank sold or transferred these bad loans to another company called ARCIL (an Asset Reconstruction Company). ARCIL paid ₹578 crore for them. This means the bank got only about 18% of the original loan value, which is normal for very old and risky loans. This is much less than the original amount because bad loans are risky and hard to recover.

Why ARCIL got the deal?

Bandhan Bank used a Swiss Challenge process to sell the bad loans, in which ARCIL first submitted the base offer. Other potential buyers were then invited to improve upon this offer by at least 5%, but no buyer came forward with a better bid. As a result, ARCIL automatically won the deal.

How Bandhan Bank Benefits from Selling Bad Loans?

The bank is under pressure because the bank’s microfinance segment is under stress, meaning many small borrowers are struggling to repay their loans. This has led to an increase in unpaid loans and a rise in bad loan ratios (NPAs) over the past year. By selling these bad loans, the bank is able to clean up its balance sheet, focus on new and healthier lending activities, and reduce future financial risks.

What experts say?

Credit rating agency Crisil believes:

• Bandhan Bank has improved its loan approval process, risk checks, and technology.

• These changes should help in the long run.

• But short-term problems in microfinance lending are still a concern.

Bandhan bank removed problem loans from its accounts by selling them to ARCIL, so its financial position looks healthier. Bandhan Bank is also planning to sell more loans worth ₹3,720 crore in a similar way, which includes group loans, small business loans, and agriculture loans. The bank expects to recover around ₹333 crore from the sale of these stressed assets.

Financial Words To Remember:

Swiss Challenge process – is a method where one bidder makes an offer and others get a chance to beat it, helping the seller get a fair price.