North East Small Finance Bank (NESFB), which is due to merge with Slice Group, is planning to sell over Rs 600 crore of its stressed loans to Asset Reconstruction Companies (ARCs). This is part of a move to clean up its books ahead of the merger.

Rating agency CRISIL has placed NESFB's Tier-II bonds ""under watch with developing implications"". The sale of the stressed loans, along with controlled growth in the loan book until the merger, is expected to improve the bank's asset quality in the near term. This should lead to a gradual reduction in credit costs and a return to profitability in the normal course of business.

The stressed loans comprise gross non-performing assets (NPAs) and restructured loans.

The Reserve Bank of India has given a ""No Objection Certificate"" for the proposed merger between NESFB and Slice Group entities. The merger is expected to be completed within 9-12 months, after which there will be only one entity, NESFB, subject to regulatory approvals.

NESFB's asset quality has been weak, impacted by the pandemic, floods in Assam, and the adjacent north-eastern region. As a result, the bank's GNPA has surged from 10.9% in March 2022 to 24.9% on 30 June 2023.

Profitability has also been modest, constrained by elevated provisioning requirements. For the financial year 2023, the bank reported a loss of Rs 213 crore, up from Rs 123 crore in the previous year. For the first quarter ended June 2023, the bank reported a loss of Rs 8 crore.