Mumbai: Asset Reconstruction Co. (India) Ltd, or Arcil, the Mumbai-based company that buys bad loans from banks and makes money by recovering them, has shifted its focus to the retail sector by building a home loan portfolio of Rs2,000 crore in the past year through Arms, its distressed consumer loans division, said a top executive at the firm.
At Rs300 crore, the private sector ICICI Bank Ltd is the largest contributor to this portfolio, S. Khasnobis, managing director and chief executive officer of the company Arcil, said in an interview last week.
Recovery time: Arcil’s Khasnobis says the Reserve Bank of India’s move to give banks more time to restructure stressed loans relieved pressure on them but affected the asset reconstruction firm’s business. Abhijit Bhatlekar / Mint
“Even the NHB (National Housing Bank) has sold its portfolio but a large (portion) of it is coming from ICICI Bank, because they would like to clean up (their books),” he said.
ICICI Bank said there was no addition to the figure of Rs450 crore it had announced earlier this year.
“Our home loan sale to asset reconstruction companies has already been disclosed by us in June,” the bank said. “There are no new transactions.”
Arcil, India’s first and largest asset reconstruction company, was set up by State Bank of India, IDBI Bank Ltd, ICICI Bank Ltd and Punjab National Bank.
The change has come as bad loans from the corporate sector have declined following a Reserve Bank of India (RBI) move earlier this year that let banks restructure loans, essentially giving companies either more time or reducing interest rates on stressed loans.
Banks were given time till 30 June to restructure loans. Each of these, except those made to the realty sector, could be restructured twice. That affected Arcil’s business because it relieved the pressure on banks to get bad loans off their books, Khasnobis said.
“If there is no fresh generation of NPAs (non-performing assets), obviously the flow will be affected. Today NPAs have stemmed, the flow has come down,” Khasnobis said.
However, business on the retail side has picked up. “We have sold more than 50 flats so far and there are another 200 more coming up for sale by the end of the financial year, largely in the range of Rs4 lakh to Rs5 lakh (per flat),” he said.
Arms was formed in August 2008 and buys distressed home loans from banks at a discount. The company then either tries to recover the home loan or sell the apartments at a profit.
The firm is now looking to increase its share in the retail market, opening 15 offices in nine states. “We intend to cover 22 locations by March or June next year, which will give us reach to over 70% of our retail portfolio,” Khasnobis said. “We have acquired about 35,000 retail NPL (non-performing loan) accounts, out of which 10,000 are presently being serviced by us. We will be taking over servicing of the rest in six months to one year.”
However, the corporate book still dominates Arcil’s business. “By and large, 120 corporate accounts by value would represent more than 70% of the assets under management, including the retail loans, so it does not make much sense for us to have a number of offices for handling corporate accounts,” he said.
At the same time, home loans make more sense, he said, because credit cards and other debt don’t have a market in India as “banks do not want to sell it for 2 cents or 5 cents, which is the global value”.
“Banks prefer to keep it lying there, expecting to sell it for 10 cents of the present value. Recovery of unsecured loans is also labour intensive, it takes time to recover and there is huge uncertainty,” Khasnobis said, referring to the price per dollar.
“Arcil has not ventured into the unsecured loans segment but when we acquired the entire portfolio of one of the banks, it included some unsecured loans and priced it that way,” he said.
Arms will have to understand the unsecured loans market before getting into it because “the value of the personal loan deteriorates much faster,” Khasnobis said.
“If we do not recover it in time, loss of value can be as high as 50% in six months. And if the collection does not happen in two years, then you can forget about it, so obviously you have to act fast,” he said.
V.P. Shetty, executive chairman, asset reconstruction, at JM Financial Ltd, which started acquiring bad loans in December last year and competes directly with Arcil in the corporate loan segment, said the retail loan business is not easy to get into because it involves infrastructure and manpower. JM Financial currently does not have a presence in the retail loan segment, and Shetty declined to say if it would enter that market.
“You cannot expect to get into the retail business with just one office, you also need people for collection,” he said.
A banking analyst from a foreign brokerage, who declined to be named, said retail bad loans are being sold mostly from private banks right now because public sector banks are not too keen on getting rid of them.
“PSU banks are not active because they are not happy with the pricing of these loans, hence PSUs are carrying more NPAs in their books compared to private banks,” he said. “Going forward, however, I expect business for companies like Arcil to come from the corporate side as some restructured loans turn into NPAs at the end of the current quarter.”
In August, Mint reported that Arcil partnered with mjunction Services Ltd, a 50:50 joint venture between Tata Steel Ltd and Steel Authority of India Ltd (SAIL), to sell repossessed flats through online auctions. At the time, Khasnobis had said that such auctions were cost-effective, transparent and more likely to attract buyers nationwide.
Khasnobis said in the future the retail part of the business could combine home loans and unsecured loans, which includes credit card debt, because of the synergies between them.
“A home loan defaulter would invariably have defaulted on his credit card. They may be having multiple credit cards because when they want to avoid their home loan default they resort to this kind of borrowing,” he explained, but added that Arcil would not get into this market segment without first understanding the subject and acquiring the ability to move fast.
Arcil is also in the process of raising funds to buy third-party distressed debt. “We intend to raise up to Rs3,000 crore in two years with multiple closing, the first of which is Rs600-800 crore (and) is expected in the next one month,” he said. Arcil will contribute 20% of the fund “because banks may not participate in a big way to acquire other banks’ NPLs, whereas mutual funds cannot invest according to regulations, and insurance companies are not expected to exhibit a significant appetite for this class of assets”.
Khasnobis said a couple of overseas investors were expected to participate in the fund, without elaborating.