Calcutta, Nov. 9: A host of public sector banks are preparing to purchase some standard assets of financial institutions (FIs) to increase the size of their asset books.
Among the institutions being targeted for such asset buyouts are Unit Trust of India (UTI), Industrial Finance Corporation of India (IFCI) and Industrial Development Bank of India (IDBI). The assets to be bought out include institutions’ share in consortium loans.
Senior officials of Vijaya Bank and State Bank of India said they are ready to acquire good quality assets from financial institutions and consortium members, including UTI.
Confirming the move, senior officials of IDBI said banks are knocking on their doors to snap up good assets.
In fact, moves by public sector banks such as Indian Overseas Bank and Vijaya Bank to strengthen Tier One capital were designed to increase exposure limits.
Banks are currently covered by an exposure limit of 15 per cent of their net worth to any specific industry/industrial groups. Consequently, banks with low net worth were not in a position to increase their lending limits.
Besides, raising Tier Two Capital in the form of subordinated bonds, the bankers said, was not a solution because these funds are not treated as part of net worth.
The bankers said with institutions such as UTI opting out of the corporate debt restructuring packages, public sector banks had identified opportunities for increasing their risk-weighted assets.
The corporate debt-restructuring packages include re-negotiation of some terms of the existing standard assets to lower interest rate on loans.
Bankers, however, said these kinds of takeout pricing would not impact them. This was because they currently have a weighted average cost of working funds of 5.5-6 per cent.
Financial institutions, by contrast, have a considerably higher cost of working funds. With the recoveries of non-performing assets, banks’ funding costs would fall below 5 per cent.
Given the fact that some original assets were funded at rates as high as 15 per cent, even if the assets are bought out at current prime lending rate of 11.5 per cent or renegotiated as part of the debt recast plan, banks are still expected to make a spread of about 4.5 per cent.