The quantum of stressed assets or bad loans in the Indian banking system has exceeded Rs1 trillion and around Rs9,000 crore of this is because of retail loans that have turned bad. Industry experts say this will increase to Rs15,000 crore soon, on the back of aggressive lending by banks in the past few years.
That bodes well for the business prospects of asset reconstruction companies (ARCs) that buy and sell bad loans. Apart from ARCs, private sector banks such as Kotak Mahindra Bank Ltd and foreign banks such as Standard Chartered Bank and Deutsche Bank also actively participate in buying bad loans.
Among ARCs, the dominant and oldest player is Asset Reconstruction Co. (India) Ltd (Arcil), which was set up in 2003. The company has bought more than Rs32,000 worth of assets for around Rs8,000 crore. Other active ARCs include Pegasus Asset Reconstruction Pvt. Ltd, Dhir and Dhir Asset Reconstruction and Securitization Co. Ltd, International Asset Reconstruction Co. Pvt. Ltd, Asset Care Enterprise Ltd and ASREC (India) Ltd, but none is as aggressive as Arcil.
Arcil managing director and CEO S. Khasnobis
There are at least half a dozen applications for new ARCs that have been filed with India’s central bank, the Reserve Bank of India. Reliance Capital Ltd, part of the Reliance-Anil Dhirubhai Ambani Group, is one such applicant. However, banks that have bad loans on their books are not too eager to sell such loans and asset reconstruction firms have had to curb their aggressiveness in the face of “unrealistic price expectations” of banks for their bad assets.
In a candid interview with Mint, S. Khasnobis, managing director and chief executive officer of Arcil, talks about the business of buying bad loans and outlines the road map of the premier bad debt aggregator of India. Edited excerpts:
Why did you sell Rs4,000 crore of bad assets to Deutsche Bank?
Unlike in equity, there is no established market for the paper that asset reconstruction companies offer. Investors in securitized paper (known as security receipts or SRs) have a vital role to play in the growth of the asset reconstruction market.
Incidentally, the deal size is not Rs4,000 crore. It only represents the size of the selling bank’s loan amount plus the interest at the point of transfer of the asset to Arcil. The actual deal size in much lower. Sale of SRs by Arcil to another player, in this case Deutsche Bank, selected on the basis of a transparent process, is a step forward to develop the market.
At least 15 entities participated in the sale process. We are like facilitators to the development of this market. Arcil, however, may participate in similar deals at a subsequent stage and buy non-performing assets (NPAs) from Deutsche Bank.
What is the quantum of retail loans that have been bought by Arcil in current fiscal year?
From September onwards we have bought about Rs600 crore worth of retail loans. We have one tranche from National Housing Board (NHB) and two others from ICICI Bank Ltd. We expect this to go up to Rs2000 crore by March 2009.
Are you also looking at buying personal loans and vehicle loans?
These loans have to be bought very cautiously. When we buy the home loan portfolio of a borrower, it makes little sense not to look at his entire cash flow. It makes sense to aggregate all class of loans of a particular borrower and try to recover value from it. We will, however, have to move very cautiously on this.
Is Arcil now outsourcing the recovery of loans?
We are not outsourcing recovery for large accounts. We have about 70 people servicing 200 large accounts. The total debt in these companies is about Rs20-25 crore. Besides, there are a large number of small accounts in the banking system and also a large number of NPAs that are over a decade old. In these accounts not only do we have to invest large resources, but also it requires local knowledge that can only be provided by local institutions.
So we tied up with institutions such as Industrial and Technical Consultancy Organisation of Tamilnadu Ltd, Andhra Pradesh Industrial and Technical Consultancy Organisation Ltd in the south and even some of the old non-banking finance firms help us identifying the borrower. We outsource only to the extant of identifying the borrower, talking to him and engaging him in discussions.
Most of the auctions of bad loans have failed last year. Why?
Banks have unrealistic price expectations. There is no transparency; the banks do not provide full information to the sellers and they withdraw when the price does not match their expectations.
Nowhere in the world are banks allowed to withdraw from the auction because the pricing is not to their liking. There must be a transparent mechanism. Internationally, there is a reserve price kept with a third party, and it is shown to the auction participants if nobody matches this price. At the final stage, the best bidder is called to negotiate.
But in India banks do not even show the reserve price. In fact, the interest for sale is not from within. Banks only sell when an bad asset becomes a “hot potato” and they are not willing to hold on to it any longer. As a result, bidders lose significantly in terms of time and effort.
Are you raising funds?
We are raising some equity and hence there will be some change in the shareholding pattern after the equity offering. We plan to raise at least Rs1125 crore. Post this offering, the collective stake of the existing major sponsors such as State Bank of India, Industrial Development Bank of India Ltd, Punjab National Bank and ICICI Bank will come down from 70% to 60%. A rights issue is currently on and it will be followed by a private placement by mid-March.
Is Arcil also considering a public offering?
We are not averse to the idea of a public offering, but we need some income stability before we finalize any plans.