State of bad loans pathetic; recovery difficult even with economic revival, warns Arcil

Rising stressed assets in India’s banking system is a major concern for the Reserve Bank of India (RBI) and government, as total non-performing assets (NPAs) of Indian banks have neared Rs3 lakh crore and if, coupled with restructured loans, the total chunk of stressed assets stands at about 12 percent of total bank loans. Asset reconstruction companies (ARCs) play a crucial role in assisting banks to get at least a part of the bad loan burden off their balance sheets. These entities acquire bad assets from banks and attempt for recovery by initiating a turn around plan for the troubled companies. In an interview with Firstpost, P Rudran, Managing Director and CEO of Asset Reconstruction Company (India) Ltd (ARCIL), the largest ARC of stressed assets in the country, said the state of bad loans in the country’s banking system “looks” pathetic at this stage with erosion in the value of such assets. It will be difficult for banks to get back their money even if the economic recovery materializes, Rudran said. Edited excerpts: What is your sense about the current bad loan scenario and the outlook going ahead? Even though corporate India is expected to post better results in about two quarters from now, the state of current NPAs looks pathetic. Even a recovery in the economy may not do much for these banks because the NPA accounts have lost money and the units have become unviable. The absence of a proper bankruptcy law makes the process of recovery that much more difficult. CRISIL reports that capital expenditure next year could actually fall; it is a 4% drop if one considers a clutch of 192 companies that accounted for nearly half of last year’s investments, and a much steeper 11%, if only private sector players are polled. CRISIL puts the reticence down to lack of visibility on demand but there is clearly more to it, for instance, the inability to cobble together equity  while being over-leveraged. If industry isn’t going to spend to build new assets, it is important to salvage all the physical assets worth thousands of crores of rupees that aren’t being put to use because promoters aren’t able to run the plants efficiently. The way to go about this—apart from hurrying up the coal and gas linkages for stranded power plants—would be to facilitate the handing over of under-performing assets to new owners who have the financial wherewithal to buy them out. The one reason industrialists don’t come forward to buy assets—especially foreign companies—is because they are not confident of being able to handle the legal system. Banks must have the upper hand and it is up to the government to make sure there is a swift change of hands. What is the bad loan acquisition target for Arcil for fiscal year 2016? We are targeting NPA acquisitions of around Rs 3,500 crore in fiscal year 2016. We have made presentations to banks to bridge the gap between their expectations and those of ARCs. This is an achievable target as the market has abundant to offer. We are focusing on quality of NPAs rather than quantity. Pricing of assets has acted as hurdle between banks and ARCs when it came to bad assets transactions. What is the scenario now? This has always been an issue and will persist for long as there are no standards set for them. The transaction is very much like trading a product between buyer and seller. The NPA is the product here. Banks are the sellers and want to recover the best price for their product. [caption id=“attachment_2179647” align=“alignleft” width=“380”]  Arcil MD P Rudran[/caption] Banks are expected to sell the assets to ARCs at a stage when the assets have a good chance of revival and a fair amount of realisable value for rehabilitation and reconstruction. The reconstruction is generally not feasible within the 8-year limit imposed by RBI. Hence ARCs largely focus on liquidating the assets. This is one of the major factors which leads to price mismatch as the collateral loses value in the time span of 8 years. Also there are numerous factors like statutory liabilities which have to be considered while arriving at the Offer price which are not discounted by banks. How do you see the union budget proposal to bring NBFCs with above Rs500 assets to Sarfaesi? It will expedite the loan recovery process and help curtail the bad debt in the system. It will improve the viability of these growing intermediaries. It will bring down the NPA recovery time period. I understand in the current fiscal, Arcil’s bad loan purchase has significantly fallen compared to the previous years. What are the specific reasons for this happening?  The reduction in acquisition is due to non-conclusion of deals by banks though we participated in many auctions and were also declared as the highest bidder. However, our scientifically estimated value of the financial assets after doing a detailed due diligence did not match with the reserve price fixed by banks due to a variety of reasons. We are optimistic that the pricing issue will be sorted out mutually. Arcil was planning a Rs 500 crore fund for business expansion/ purchase of bad loans? What is the status? The investment objective of AARF-III is to achieve optimal returns through resolution, recovery and reconstruction of acquired NPAs pertaining to corporate, SME and retail loans. Arcil is targeting commitments of Rs 200-250 crore by leveraging relationships with domestic QIBs and FIIs established during prior fund-raising endeavours. We are in regular contact with existing fund investors & potential investors for raising commitments towards AARF-III. As is the case in Arcil’s earlier funds, it is envisaged that AARF-III will have continuous cash flows to investors as opposed to tail-ended cash flows that are more typical of PE/VC funds. Since last year, RBI has changed rules pertaining to NPA recognition and provisioning requirement of bad assets. In your view, how much these changes would help  speed up loan recovery? In a boost to banks which are facing rising asset quality issues, the RBI has allowed such lenders to reverse the excess provision on sale of bad loans to their profit and loss account provided the transaction took place before 26 February 2014. The move is aimed at incentivizing banks to recover appropriate value in respect of NPAs. Almost all the banks, including private sector players, have been reporting higher NPAs and lower profits as they have to make more provisions for bad loans, which crossed 5.5% as of December-end. Together with restructured loans, the total pain  is close to 12%. The new guidelines extending the sale period prior to February 2014 will help banks report better numbers and thus take some pain off their back. Will there be any major ownership changes at Arcil or are you looking at any fresh round of investments? I have no idea at this point of time.