When bidding for the sale of R1,500-crore loans extended to Abhijeet Group firm Corporate Power was underway in March, several asset reconstruction companies (ARCs) stayed away, fearing that recovering the money would be difficult, if not impossible. Given that an ARC must fork out 15% of the loan value upfront, they were understandably cautious on an asset that many banks had written off.
State Bank of India (SBI) recently sold the R1,500-crore loans to Asset Reconstruction Company India (ARCIL) for R340 crore, a 77% discount. There was a fair bit of bargaining, with ARCIL arguing that since the 1,080 MW plant was located in the Maoist-affected Latehar district of Jharkhand, it would be difficult to find a buyer.
Though ARCs typically pick up assets that have some value left in them, in India banks let go of assets late. Siby Antony, MD & CEO, Edelweiss ARC, observes that more often than not, banks sell to ARCs as a last resort. “Banks are using ARCs as a last resort of recovery, like a scrap dealer,” Antony says, adding that when an account becomes worthless, banks sell it to an ARC in the hope of recovering something. “That is not reconstruction — assets should be sold when there is still life in them,” he asserts. Union Bank, for instance, sold R363-crore accounts that had been written off and only R78-crore fresh non-performing assets (NPAs) last year.
It’s not surprising then that the ARC business isn’t exactly booming. ARCIL, the country’s oldest ARC, saw recoveries fall to R783 crore in FY14 from R1,034 crore in the previous fiscal. The company observed in an RoC filing that with stressed borrowers finding it hard to raise funds and legal challenges cropping up, there was an adverse impact on recoveries in FY14.
Under the current model, ARCs charge 1.5% of the asset value as annual management fee. So, if an ARC buys an asset for R100, it must pay R15 upfront and the rest, R85, in security receipts (SRs), which can be redeemed after recovery starts. Thus, if the ARC recovers R40, it will charge R6 as management fee and the rest, R34, would be distributed between the bank and the ARC in the ratio of 85:15.
Analysts say when the spoils are divided, the highest priority is given to administrative expenses and management fee. Only after management fees are paid can the money be used to redeem SRs.
P Rudran, former MD & CEO, ARCIL,had told FE in a recent interview that only four out of 10 assets bought resulted in profitable recoveries. “We try to cover up the losses in recoveries of six assets with the help of four profitable recoveries,” he had said.
After buying an asset, ARCs attempt to recover the loans through compromise settlements. The legal mechanisms of the debt recovery tribunal (DRT) and the Sarfaesi Act are also used.
At the moment, Antony is trying to revive Bharati Shipyard and fighting multiple legal battles on the company’s behalf, whose loans were bought by Edelweiss last year. “All NPAs are not bad, some are good as well. When the RBI governor said ARCs should be utilised, what he meant was banks should sell fresh NPAs to them so that they can revive the assets.”
However, there’s a hurdle — aggregating the debt, given how banks auction loans individually even when they are part of a consortium. “Unless we are able to aggregate the debt, we can’t make the borrower pay up. Before the NPA is sold to us, it is scattered across banks and the borrower is smart enough to pay one and not pay another,”
Edelweiss’ Antony explains. Eshwar Karra, CEO, Phoenix ARC, agrees that debt aggregation is a challenge. “Some banks are not in favour of sale to ARCs and each bank’s strategy to resolve the issue is different. Aggregating loans results in delayed recovery,” says Karra.
Although the RBI allows banks to sell accounts in the SMA-2 category —or those with overdues of more than 60 days — to ARCs, the latter aren’t keen on these. That’s because when an ARC picks up an asset, is is parked in a trust and doesn’t require to be provided for. However, as Antony explains, if an SMA-2 account is bought, it would need to be part of their books and provided for if it turns into an NPA. “Typically, NPAs are housed in a trust but SMA-2 accounts can’t be put there since they aren’t technically NPAs,” he points out.
Bankers for their part believe ARCs aren’t trying enough to recover money despite buying deeply discounted assets.
PK Malhotra, deputy MD, SBI, says ARCs should realise that since they are buying discounted assets, they must hasten the recovery process and not wait for eight years — which is what the rules require.
Ram Sangapure, executive director at Punjab National Bank, says ARCs have started demanding huge discounts.
“We have not been selling any loans to ARCs in the last couple of years as we do not want to sell assets at such discounted rates,” Sangapure says.
Rudran estimates lenders may have sold NPAs worth R20,000 crore to ARCs in FY15 out of the more than R90,000-crore assets put on the block, which is less than a fourth. With the challenges persisting, the story is unlikely to be very different this year.
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