The central bank has given its approval to the International Asset Reconstruction Company, making it the fifth company to enter the business of buying bad loans from banks.
The company, founded by three bankers—former State Bank of India (SBI) chairman M.S. Verma, a former senior SBI executive Virendra Kumar and a former senior Bank of America executive Arun Duggal—is preparing to open for business in early April. The Rana Talwar-headed Centurion Bank of Punjab has a little over 29% stake in this company. Another private bank, City Union Bank, holds an identical stake.
Verma, who has also been India’s telecom regulator, told Mint: “We will work in close cooperation with other asset reconstruction firms. We will support the existing management of the firms that have stressed assets and try to handhold them instead of stripping assets and selling them.”
The other four reconstruction firms operating in India are Asset Reconstruction Company of India Ltd (Arcil), promoted by a clutch of banks including SBI and ICICI Bank; the Unit Trust of India (UTI) promoted ASREC(India); the IFCI -promoted ACE (Assets Care Enterprise Ltd); and the recently set up Pegasus Asset Reconstruction Company. Arcil, the only active buyer of non-performing loans, has so far bought Rs22,412 crore worth of bad assets involving 63 firms and has recovered almost Rs2,000 crore of this amount. The banking system has Rs1 lakh crore of bad assets.
“We are going to concentrate on fast recovery of bad loans as we buy them from banks. We are drawing up various strategies and we will do so in accordance with best international practices in bad loan recovery,” said Virendra Kumar.
Kumar, the former managing director of SBI Caps, theinvestment banking arm of State Bank of India, will be International Asset Reconstruction Company’s managing director. Verma will be its chairman and Duggal, its vice-chairman. “We could carry out our functions in two broad ways—by either buying bad loans directly, or by working with banks as their agents for recovery of bad loans. As we go ahead, capital will not be a problem as foreign investors are lining up to invest in this business as it grows,” explained Kumar.
Asset reconstruction companies buy bad loans from banks at a discount to help them clean up their balance sheets. At the next stage, the fund recovers the loans and resells them to fresh buyers at a premium to the original price at which these loans are bought.
The growing interest in the bad loans business could be a precursor to creation of ajunk bond market in India, say analysts.
Reliance Capital also has plans to float an asset reconstruction fund along with three south India-based public sector banks, Indian Bank, Vijaya Bank and Corporation Bank. Billionaire investor George Soros-owned fund Dacecroft and New York-based investment firm Blue Ridge are reportedly interested in picking up stakes in the proposed asset reconstruction fund. However, the Indian banking regulator has not yet cleared the proposal