ARCIL acquires Rs 3067 crore bad loans in first 7 months

The Asset Reconstruction Company (India) Ltd (ARCIL) has acquired non-performing assets (NPAs) aggregating Rs 3,067 crore in the first seven months of its operation for the year ending March 31, 2004.

Majority of the bad loans was taken from State Bank of India, ICICI Bank, IDBI, State Bank of Hyderabad, Punjab National Bank and Development Credit Bank.

As and when other lenders to the sticky loans (which have already been taken over) decide to sell their exposures to ARCIL, the total amount will work out to Rs 8,801 crore. This represents about 9 per cent of the gross non-performing assets (NPAs) of the banking system. An asset can be fully taken over if 75 per cent of the lenders (in value term) agree to a selloff.

The principal debt worth Rs 3,067 crore was bought at Rs 1,600 crore, at a discount of about 48 per cent. The debt was bought from 116 cases. A slew of investors including GE Caps, Citicorp, Clear Water besides investment banks such as Morgan Stanley and Merrill Lynch have been discussing with ARCIL to pick up some assets.

"We are exploring all opportunities ranging from strip-sell to bringing in new equities from some assets," said an ARCIL executive.

It is offering multiple investment opportunities to potential investors to invest in distressed debt papers at every stage during the resolution process including debt aggregation, resolution and post resolution stages.

"We've held discussions with a number of global investors including distressed debt/ asset funds, multilateral agencies and private equity funds. They've shown their willingness to work along with us in creating a distressed debt market in India," said the official.

He pointed out that foreign investors prefer to invest at an early stage and are interested in participating in resolution (work-out strategies).

The NPAs comprise corporate loans backed by collateral of plant and machinery compared with the South East Asian region where majority of NPAs comprise real-estate and retail loans. The sale of financial assets to ARCIL enables NPAs to be taken off the loan books of banks/ institutions and unlocks value.

Sale of NPAs on a portfolio basis enables loss on sale of any one asset to be set off against gains on another, subject to Reserve bank of India guidelines on provisioning/ valuation norms.

It reduces expenditure on NPA maintenance and releases resources for core operations. The cost of carrying and holding NPA in books of the banks is nearly 7.25 per cent.

Sellers have an opportunity to invest, as qualified institutional buyers, in security receipts issued by Arcil for acquisition of NPAs. This enables sellers to get 80 per cent of the upside, if any, realised from the underlying financial assets.