Asset Reconstruction Corporation of India Ltd (Arcil), the country’s first and the largest asset reconstruction company (ARC), has seen a decline in new business, so much so that the pool of non-performing assets (NPAs) with banks has been depleted. Managing Director and Chief Executive S Khasnobis tells Shilpy Sinha and Sidhartha that restructuring of stressed assets has hit creation of NPAs.
The company has stepped up focus on retail assets, where margins are better. Excerpts:
How has business been affected since the Reserve Bank of India (RBI) allowed banks to restructure loans for a second time without classifying these as NPAs?
Due to the prudential measures implemented by regulators last year in the backdrop of the global financial crisis, the flow of NPAs available in the market for sale has been impacted. This does not mean that there is no stress in the banking system. Restructured loans are not defined as NPAs and so remain outside the purview of ARCs. Sale through the auction processes of banks has been lower compared with those through bilateral negotiations. Many auctions were called off after the bidding stage due to the gap between the value offered by the best bidder and what was expected by the banks. Our business is also cyclical like any other industry. So, we need to be patient in the down cycle.
With RBI mandating a loan-loss coverage ratio of 70 per cent, will the supply increase?
There could be some flow into the market as banks are expected to achieve the 70 per cent provisioning cover by September 2010. Banks will have to decide what to sell as there may not be an improvement in the provision cover if the sale price of NPAs is lower than their book value.
Are you facing competition since there are many more players now?
Most ARCs have received licences in the past 18 months or so, during which generation of NPAs and consequently, the deals on offer, have been on the decline. For an objective assessment, there has to be a supply of NPAs to compete for.
How is Arcil’s retail venture, Arms, doing?
Today, the total assets under management of our retail NPA portfolio are around Rs 1,500 crore. Most of these are housing loans. There is also a small portfolio of auto and commercial vehicle loans. We have not acquired unsecured loans. It was a conscious decision to take over servicing of portfolios in stages, after building the capability for collection and monitoring. So far, we have taken over servicing of 30 per cent (by number) of the retail accounts acquired.
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We are steadily expanding our retail branch network and have offices at 14 locations in nine states. By the end of this financial year, we plan to have 22 locations, which will cover 70-80 per cent of our retail loan portfolio. In a span of two years, the aggregate recoveries in the retail NPA segment have exceeded Rs 450 crore, which is about 30 per cent of the acquisition value.
What will be your retail-corporate mix?
Around 12-15 per cent of the assets under management fall under the retail segment. Many small and medium enterprises (SMEs) will also come under a similar collection structure. If you factor that in, the proportion could be higher. So far this year, we have acquired financial assets to the tune of Rs 1,080 crore. Of this, retail accounts for around Rs 300 crore.
Which business segment is more profitable, corporate or retail?
Though the cost of collection is higher for retail, the margins are better. As a thumb rule, in case of large accounts, you make decent profit in three out of 10 cases, break even in four, and end up losing in four. The trick is to have three good cases generating enough profit to compensate for the other seven. But in retail, the risk is distributed evenly.
Has the economic slowdown resulted in above-normal-profit cases getting affected?
During a slowdown, deals in which resolution and recovery are linked to infusion of funds by third-party investors are generally affected due to unfavourable investor sentiment. Last year, that was an issue. So, the holding cost goes up, affecting profitability. ARCs are required to realise the value from NPAs within five years, whereas there is no such limit for others in the system. It is, therefore, a challenge for ARCs to maximise returns within the given period.
You were raising a $600 million (around Rs 3,000 crore) fund. Have you raised it?
The effort is on. We are looking to raise Rs 3,000 crore with multiple closings over the next 18-24 months. The challenge is that we need a domestic holding of not less than 51 per cent of the fund size and only banks and insurance companies can be expected to participate. While banks have their own NPA portfolios to manage and are cautious while committing to financing acquisition of other banks’ NPAs, insurance companies cannot be expected to have a significant risk appetite given the nature of their business.
While foreign institutional investors are willing to put in 49 per cent, they do not like the sub-cap of 10 per cent. We have commitments to the tune of Rs 600-800 crore, including from a couple of foreign investors. With that, we can expect the first closing of the fund by the end of December.