Kotak weighs setting up ARC

The Kotak Mahindra group, which has an asset reconstruction division, is toying with the idea of setting up a full-fledged asset reconstruction company in line with similar companies in the sector, instead of taking equity participation in any of the existing companies that were being floated.

"We have an existing asset reconstruction division where we buy bad assets from banks and ailing companies at a discount and reconstruct them, ultimately selling it to a third party at a profit.

"This is a profit making centre and we might consider changing this into a full fledged ARC," explained Uday S Kotak of the Kotak Mahindra group while talking to Business Standard.

The asset reconstruction company would be floated in conjunction with other financial institutions, where the Kotak Mahindra Bank would be taking a majority stake.

Non performing asset levels at Kotak Mahindra group's is however the smallest in the industry at 0.2 per cent with the highest capital adequacy ratio of 20 per cent.

Having gathered experience in reconstructing assets from banks and the group was confident of floating an asset reconstruction company as a profit centre, said officials from the group.

Kotak said the group's own team had the expertise to value sick assets and fix a discounted value for takeover from creditors.

Several such deals had already been done with the division taking over assets from creditors and recovering expected value from the assets.

The business was high risk but also offered high returns, said Kotak. He declined to name the sellers of sick assets as the latter were reluctant to be identified.

The sale price for sick assets would have to attractive enough to offer returns of 30-40 per cent on the investment. Extension of this business would not be a problem given the skill already built up in-house.