'NPAs offer a 34% return'

Q & A: Rajendra Kakkar

What price do you pay to buy NPAs?

We have acquired NPAs worth about Rs 22,000 crore at about Rs 4,400 crore. It works to about 23 cents to a dollar. In the US, it is about 28 cents. Rs 22,000 crore includes the principal amount plus interest and other charges recoverable. We might have acquired about 10-12 per cent of the total NPAs in the system.

What's your recovery record?

In some of the large cases, we have shown excess realisation of 34 per cent. We have already exited 64 cases, of which 16 are large cases such as Saurashtra Chemicals Ltd, Pennar Aluminium, Borosil Glass Works and BPL Ltd. More than 50 per cent of the Rs 4,400 crore worth of debt has been resolved and commitments have been taken for payment which will come over a period of time. So far, we have paid Rs 827 crore to the banks.

How do you resolve a case?

They are all different in nature. We see a case on a matrix of the outlook for the particular industry and the management's credibility. If both are fine, we go for restructuring of the unit. If the management quality is suspect but the industrial outlook is good, we may try a sell-off of the company. But if the management is good but the outlook is bad then we go for an asset sale. Business sale has the tax shield and new buyers are often interested in buying out a company for the tax breaks. We also go for strip sales and even settlement with the borrowers.

If the borrower is good and the outlook of the industry is horrible, then he may like to settle with us. However, settlement is not our preferred option. Banks find it difficult to settle individually as the lendings are highly fragmented. However, the borrowers happily settle with us. In fact, once we do the debt aggregation, the borrowers start sweating. We put the gun on the table and start negotiating... With 75 per cent of debt in our hand, it makes eminent sense for the borrowers to settle with us....

It looks like a cakewalk.

Debt aggregation has been a bigger problem for us than engaging the borrower and making him perform. Even the BIFR shield cannot protect an erring borrower. Convincing the banks to do business to us is an achievement, particularly when we are asking them to invest in security receipts as we have no cash to offer.In a highly fragmented holding, it is nearly impossible to aggregate all working capital lenders as the value of the current assets on which they have first charge is negligible or zero by the time these cases come to us. Some borrowers have become smarter. The moment they see us approaching, they start settling in different pockets. So that nobody is able to acquire 75 per cent of debt which triggers the enforcement of the act.

How do you sell an asset?

Since there is no market for stressed assets, the law permits the sellers to double up as investors. Once we decide to acquire an asset, we approach the treasury division. If it agrees to invest, we issue the security receipts to the treasury and pass on the cheque we get from the treasury to the loan department of the bank.

So, the stressed assets are shifted from loan book to investment book? A sort of warehousing?

Not exactly warehousing. The treasury invests in a pool of assets and not a single asset. We create the pools from stressed assets bought from different banks. So, a bank does not exactly subscribe to the security receipts of its own assets. Banks keep on getting money as and when we recover.

So is it a mechanism to whitewash their balance sheets?

I strongly disagree with you. Arcil is increasing the bandwidth of banks. They can get involved in productive activities and core lending as we take care of recovery. That itself is a qualitative improvement. Arcil has changed the whole climate of stressed assets. The borrowers have become more conscious. As a banker you are making an investment in an asset which has an upside.... It's good investment. Banks, mutual funds and insurance companies must start investing in security receipts as a new class of assets. I am giving a return of 34 per cent compared with 5 to 7 per cent return on government bonds.

How do you share the upside?

If we realise more than the acquisition cost, we offer 80 per cent to the investors and 20 per cent is retained by Arcil.

Are the security receipts tradeable?

Yes, among the qualified institutional investors. The RBI has allowed 49 per cent investment by FIIs with a cap of 10 per cent of individual FIIs.

Are the FIIs interested in buying the security receipts?

There has been talk that the FIIs should have been allowed more than 49 per cent but I do not want to find fault with the regulator. We have spoken to 200 FIIs. They are interested in investing in our fund which is being created. We are raising Rs 3,000 crore and 49 per cent of this will come from FIIs. The fund will invest in a pool of assets and, hence, the risk will be well-spread out. Moreover one will be investing in the Indian economy. The NPAs are in great demand and people want to acquire the assets either for tax shield or for backward or forward linkage. The problem is with the domestic players. I cannot raise from abroad unless I first tie up with the domestic players who are not hugely interested.

Will Arcil die after five years?

No. Each trust created for asset pools has to be liquidated within five years. The NPAs are a by-product of all lendings and the flow will continue to be about Rs 15,000-Rs 20,000 crore every year. The limited-life concept of an ARC is borrowed from abroad where they are set up to firefight a crisis. Here, it is a proactive step to deal with the flow of NPAs and a part of the financial system. It will stay for perpetuity.