Edelweiss ARC has topped the charts in the fledgling asset reconstruction industry, with aggressive purchases of distressed assets during the past two years. Siby Antony, MD and CEO of the asset reconstruction company (ARC), explains what went into that drive, while also pointing out that the current high level of distressed assets (nearly 11 per cent of loans) in the economy, is abnormal.

He says that even normal delinquency levels of 1-2 per cent of loans will itself provide enough business for ARCs in future. Providing sufficient capital for this will be a challenge until all ARCs develop a track record and are able to tap the market, he says. Excerpts:

Do capital adequacy guidelines for ARCs need revision?

Yes, they do. As things stand, if capital is between ₹2 crore and ₹100 crore, then one should have a capital adequacy of 15 per cent – which means you can only do business seven times your capital amount.

But once you reach a capital base of ₹100 crore, that stipulation goes away. There is a conflict here and we have taken it up with the RBI. We need a lot of capital, particularly with the 15 per cent upfront cash that we have to pay. It is a capital-intensive industry. We have a capital of ₹160 crore, and a subordinate debt of ₹1,400 crore from our sponsor Edelweiss group.

What is the way out for ARCs?

Since capital is scarce in ARCs, any subordinate debt from its sponsors should be treated as Tier-II capital for the sake of capital adequacy. The RBI is considering this.

What about raising capital from the market?

There are two broad types of ARCs – one backed by financially strong groups – these include Edelweiss, JM, Kotak, Reliance, etc. All the others (11 more) are standalone and face a bigger challenge in raising capital. Cash flow mismatches are common in ARCs. Long-term funds from banks or five-year bonds would be ideal, but one needs good rating.

The RBI recently expressed concern about low yields and poor redemption rates of security receipts (SR). What are your views?

The return on equity (RoE) for the industry is generally around 7 per cent and the return on assets (RoA) is low. Poor redemption of SRs have often been raised. The real sale of ‘fresh’ NPAs started only in September 2013 after Raghuram Rajan took over. Till then, banks used ARCs only as a last resort. By that time, it is junk and you cannot recover anything. Now, things are changing and our recovery rates should improve.

How can ARCs recover money better when banks that know the customer themselves fail?

It’s true that banks know the customers better.

But the difference is in focus. For banks, NPA is a by-product of their normal business.

They should not use their bandwidth for this. They should sell it to a specialised agency that deals with it in a focused way. Second, you’ll find that banks may not actually have a long engagement with borrowers. The personnel at banks keep changing and that leads to a lack of continuity.

Are banks more willing to sell distressed loan assets now?

They sure are. But the reason why it has not picked up to the desired extent is that their balance sheets do not permit them to take a haircut.

In this business, without a haircut, you cannot do anything. However, if you revive the company (distressed asset) you will regain that.

For instance, we acquired Bharati Shipyard at 30 per cent of their principal value of ₹8,000 crore, that is at about ₹2,400 crore. When it revives, we are hopeful of getting much more.

What is the outlook for your business this fiscal?

We are at about ₹22,000 crore of assets under management. However, the AUM is incidental. We have decided to invest about ₹1,000 crore to ₹1,500 crore per annum in this business. That would translate to between ₹5,000 crore and ₹7,000 crore of AUM.

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