‘At Edelweiss ARC, we are revival focussed’

Banks have been selling their bad loans to asset reconstruction companies (ARCs) to offload some of their burden and hasten the recovery process. We spoke to Siby Antony, CEO, Edelweiss Asset Reconstruction Company, which is now the largest ARC in the country with a total asset base of ₹20,000 crore, to understand its recovery process and how it is dealing with the challenges therein. Edited excerpts:

Now that you have acquired a large stock of bad loans from banks, how confident are you of making recoveries from these assets?

At Edelweiss, we are revival focussed and have no intention of asset stripping wherever there is viability of operations. We have revived quite a few cases. The revival process is time consuming, particularly because the economy is yet to recover. But when the economy rebounds, the revival in some of the assets will be dramatic. This is because these are good and viable assets.

What does revival entail?

Many of the large assets are those that have gone through restructuring, either bilaterally through banks or under a CDR (corporate debt restructuring) mechanism. But debt restructuring alone does not help and when CDR fails, debt balloons. Take the case of Bharti Shipyard. It went for CDR with fund-based debt of about ₹3,500 crore. These companies work on very high non-fund-based limits. During the course of the CDR, most of the non-fund based limits became fund-based.

When the CDR failed, the company’s debt ballooned to ₹8,000 crore, because letters of credit (LCs) devolved and bank guarantees got invoked. We took the ₹8,000 crore of debt, at a discount, of course.

As part of our revival efforts, we first try to ascertain the sustainable level of debt. In this case, we believe that ₹4,000 crore is sustainable — possible to recover.

The remaining ₹4,000 crore does not go away and we have to deal with it. We try to convert some of it into equity. Once the company revives, we benefit from the prospects of the company and when we exit, we pass on the benefit to the banks.

But when you ascertain the sustainable debt, do you take a substantial haircut?

Yes. In every distressed asset, one needs to take a hit. We have taken some of that hit in the form of equity.

But ARCs should have sufficient capital to sustain such a huge haircut…

ARCs will have to absorb some haircuts due to the nature of activity. According to the RBI’s regulation, one can start an ARC with ₹2 crore of capital, which may change soon. As for Edelweiss, we have a good backing by the group. There are 15 ARCs in India and, of these, only four or five have backing of large and resourceful groups. Large capital is essential for ARCs, which are revival-focused because it entails additional funding.

Aside from revival, what are the other outcomes of a recovery process?

There are three strategies. One is revival. The second is settlement, and the third is enforcement. Settlement is possible where a company is asset-rich but does not have liquidity. ARCs can work with promoters to liquidate assets.

In the case of enforcement, ARCs have the power of SARFAESI. In the banking system, enforcement is a challenge. All banks do not come on the same page for sale because security is different for all banks.

There are two types of banks — one that extends term financing, which is secured against fixed assets. The other is working capital financing, backed by current assets. When a company comes under stress, current assets vanish; so a bank that has given working capital financing does not have any recourse. But their consent is required for enforcement. ARCs can aggregate debt from all banks and take an enforcement action.

What has been the experience with asset sales?

We are a young ARC and asset sales by banks have picked up only during the last two years. Over the last two to three years, economic activity has been slow and sale of industrial as well as real estate has been an issue. But there have been some signs of improvement in recent months. Once the market improves we should be able to get a good price on these assets.

How do you deal with cases where there are a group of lenders?

That is a big issue. In fact, the first 12-18 months are lost in debt aggregation. Even in the case of Bharti Shipyard, for instance, we have only 60 per cent of the debt. Unless all banks sell their assets together, it is difficult for us to initiate revival measures.

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