With non-performing assets (NPAs, or bad loans) in the banking sector expected to rise and banks required to achieve a 70 per cent provision coverage ratio by September 30, asset reconstruction companies (ARCs) are preparing for an increase in business.
International Asset Reconstruction Company (IARC) is in the process of raising a Rs 400-crore fund to buy distressed assets, with a greenshoe (over-allotment) option to raise Rs 100 crore, according to its Chairman, M S Verma. Domestic investors are expected to contribute Rs 200 crore to the fund.
The country’s first ARC, Asset Reconstruction Company (India) Ltd, or Arcil, has already raised Rs 400 crore of its proposed Rs 2,000-crore fund, according to Managing Director & CEO S Khasnobis.
Others such as JM Financial ARC and Invent Assets Securitization and Reconstruction are also in the process of drawing up fund-raising plans.
There are 13 ARCs in the country. Banks and other financial institutions sell a portion of their bad loans at a discounted rate to ARCs to clean their balance sheets.
ARCs pay for these distressed assets either in cash or by issuing a portion of the security receipts (SRs). SRs are interest-bearing securities which entitle the holder to a portion of the recovered amount.
More From This Section
According to Fitch, the level of NPAs in the system was likely to increase from 2.4 per cent of total advances as of June 2009 to 3.5 per cent by March 2011.
Banks will also be required to achieve a 70 per cent provision coverage ratio (PCR), the ratio of total provisions to gross NPAs, by September 30. “Banks might come under pressure to sell more NPAs to meet the provision coverage ratio norms. The level of NPAs in the system is also yet to peak. As a result, we might see more bad loans coming up for sale,” said Verma of IARC.
IARC bought bad assets worth Rs 500 crore in the financial year ended March 31 from five to six banks, said Managing Director and CEO Birendra Kumar.
The amount of banks’ NPAs brought into the market for sale has more than doubled in the past four years. Banks and financial institutions put on the block NPAs worth Rs 12,200 crore in 2009-10, almost 2.5 times the Rs 5,019 crore put on the block in the year ended 2005, according to data released by Arcil last month.
Arcil to invest 20% in Rs 2,000-cr fund
The country’s first asset restructuring firm, Arcil, will contribute 20 per cent to its proposed Rs 2,000-crore fund to buy more distressed assets, Managing Director and CEO S Khasnobis has said.
The firm had already raised Rs 400 crore from six to seven investors at its first close, he added. “This is a multi-close fund and a host of investors are involved. At the first close, we raised Rs 400 crore,” he said on the sidelines of an asset reconstruction seminar in Mumbai today.
The company has a net Rs 1,500 crore of owned funds.
Arcil had previously raised a Rs 300-crore fund, which has already been deployed in buying distressed assets. In the last financial year, Arcil paid Rs 600-700 crore in the form of cash and security receipts to buy such assets.
Arcil’s sponsors include State Bank of India, IDBI Bank, ICICI Bank and Punjab National Bank.