BackArcil to focus on loan recovery from retail borrowers, SMEs
In some cases, Arcil will be willing to look at making a 100% upfront cash payment when purchasing retail assets
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Mumbai: In a strategy shift, Asset Reconstruction Co. (India) Ltd (Arcil) has decided to focus on recovering loans from retail borrowers and small and medium enterprises (SMEs), while looking at mid-sized companies on a selective basis.
Vinayak Bahuguna, managing director and chief executive officer of the reconstruction firm, said this constituted a shift in strategy for Arcil as 80% of its current portfolio consists of corporate assets.
The reconstruction company has assets worth ₹ 10,000 crore on its books.
The expansion of the company’s retail assets will happen through a division called Arms. The unit, which commenced operations in 2008, has 17 locations across India and employs more than 300 employees. It currently contributes 20% of the reconstruction company’s total assets under consideration.
“The fee we charge to recover retail and large corporate assets isn’t very different but in smaller assets, we can recover much faster and the money can be invested back into the business," Bahuguna said while talking to reporters at a briefing.
In some cases, Arcil will also be willing to look at making a 100% upfront cash payment when purchasing retail assets, Bahuguna said.
Under the Reserve Bank of India (RBI) guidelines, asset reconstruction companies (ARCs) can pay 15% of the net asset value as upfront payment and issue security receipts for the rest. These security receipts can then be redeemed by the banks at a later date.
Sanjay Agarwal, executive vice-president and head-retail and SME business at Arcil, said that retail assets make up about 20% of the banking system’s non-performing assets (NPAs). As the recovery in smaller assets is more cumbersome due to the time and effort required, these assets often end up being written off by banks.
“The biggest challenge that banks face while recovering from small accounts is the expense due to the large volume of cases. We want to tell banks that we can offer specialized services in recovering these loans in a timely manner," Agarwal said.
Arcil’s move to offer full cash upfront for the bad assets it buys may attract more banks to sell retail NPAs to the firm.
“Cash today will always be more valued than tomorrow. The value of the asset on sale is usually calculated depending on the probability of returns. If the ARC can pay up fully, then the level of discounts will also be in an appropriate manner," said the deputy managing director of a large public sector bank, who did not want to be named.
Bad loan sales to ARCs had suffered after August 2014 when RBI changed the minimum upfront cash payment requirement to 15% of the net asset value, as compared with the earlier norm of 5%.
Of the nearly ₹ 50,000 crore worth of bad assets that banks put up on sale in the April-September period this fiscal year, only ₹ 6,000-7,000 crore worth of assets have been purchased by ARCs. In the October-December period, however, reconstruction companies bought nearly ₹ 10,000 crore worth bad loans out of the ₹ 30,000 core that were put on sale, Mint reported on Friday.
Considering the large amount of bad loans and stressed assets in the banking system, Bahuguna estimates that about ₹ 3-4 trillion worth of bad and stressed assets would be put up for sale by banks by 2017.
Gross NPAs of 39 listed banks were at ₹ 3.4 trillion at the end of the September quarter. This does not include restructured assets. RBI has asked banks to clean up their balance sheets by March 2017 although it has stopped short of specifying a level of bad loans that it is comfortable with. This may push bad loan sales.
“Presently, 10-15% of the assets up on sale are being bought by reconstruction companies on an average. We are expecting this to go up to 30-35% in 2017 as the prices will be more reasonable and the bankruptcy code will make resolution easier," he said.
Arcil has enough capital to fund its plans to grow its portfolio and is not looking to raise funds in the immediate future, said Bahuguna, adding that its capital base of ₹ 1,500 crore will be enough for the next three to six months.
Analysts also expect banks to consider selling home loans, loans against property and gold loans to ARCs.
“Since the value of the asset is usually higher than the loan sanctioned to the borrower, ARCs can make a significant difference with their focused recovery efforts," said Ravi Shenoy, assistant vice-president, mid-cap research, Motilal Oswal Securities Ltd.
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