ICICI Bank Ltd, India’s largest private sector bank signed a memorandum of understanding (MoU) with Apollo India Credit Opportunity Management Llc and AION Capital Management Ltd on Monday to launch an asset reconstruction company (ARC), expanding its presence in the distressed assets segment in India.
“The MoU envisages the establishment of an asset reconstruction company, subject to regulatory approvals, and acquisition of debt exposures from lenders as well as equity stakes in companies," ICICI Bank said in a statement.
“The objective of the collaboration will be to streamline the operations of borrowers, facilitate deleveraging and arrange additional funding on a case-by-case basis. This initiative will seek to revitalize distressed assets and maximize their economic value," it added.
According to a person with direct knowledge of the development, the ARC would start with investing in assets that are available on ICICI Bank’s bad loan portfolio and slowly move to a more open architecture.
“The plan is to start with buying bad loans and then quickly move to investing in equity of stressed companies. There will also be an interim management service for cases where banks want to take control. These should be operational within this financial year," said the person quoted above, on condition of anonymity as discussions are still confidential.
ICICI Bank joins a number of other entities, including banks, which see an opportunity in turning around distressed assets. On 21 July, State Bank of India and Brookfield Asset Management Inc. said they will launch a joint venture to invest in stressed assets.
Ironically, the stressed assets are emerging from the balance sheets of some of these lenders itself. The 40 listed banks in the country had ₹ 5.8 trillion in bad loans at the end of the March quarter. ICICI Bank had gross non-performing assets (NPAs) of ₹ 27,193.58 crore at the end of the June quarter. SBI, which is yet to report June quarter earnings, had gross NPAs of ₹ 98,173 crore at the end of the March quarter.
To be sure, these banks are required to operate at arm’s length basis with such joint ventures to avoid conflicts of interest.
“The ARC route is now a proven stressed asset resolution route in India. We will see improved interest in this space. With the involvement of a private investor in an ARC, the question of arm’s length is taken care of. The investor will ensure that proper checks and balances go into the process while picking up assets," said Abizer Diwanji, partner and national leader- financial services at EY.
This is not the first stressed asset venture for ICICI Bank.
The bank already has 13.26% stake in Asset Reconstruction Company of India Ltd (Arcil), the country’s oldest ARC.
AION Capital management (which is part of the MoU signed on Monday) has a strategic relationship with affiliates of Apollo and ICICI Bank and is manager of the “AION Fund" which invests in so-called special situations. These are typically companies which may be in the early stages of stress. AION has a corpus of $1 billion. In March, AION said that along with former GE Capital executives Pramod Bhasin and Anil Chawla, it will acquire the financial service businesses of GE Capital India.
There are a host of other companies queuing up to launch stressed asset funds and asset reconstruction companies, Mint reported on 9 May.
The applicants include global stressed asset specialist JC Flowers and Co., in partnership with Ambit Holdings Pvt. Ltd, domestic financial services firm IIFL Holdings Ltd and former chief financial officer of Sun Pharmaceutical Industries Ltd Sudhir Valia.
Apart from those seeking new licences, Omkara ARC and Meliora ARC got approval from the regulator in January. Both firms focus on bad loans in the small and medium enterprises segment.
Other global private equity funds such as KKR and Co., Hong Kong-based SSG Capital Management and International Finance Corp. (IFC), the investment arm of the World Bank, have already acquired stakes in existing ARCs to buy bad loans.
SSG Capital was an early entrant in this space. In September 2014, it acquired 49% of Asset Care and Reconstruction Enterprise. In January 2015, IFC invested in Encore Asset Reconstruction Co. Pvt. Ltd and in March this year, the foreign investment promotion board gave its nod to KKR for picking up a stake in International Asset Reconstruction Co. Pvt. Ltd.