Spotlight. Cash deals offer more flexibility in resolution: Omkara ARC chief

We prioritise swift action to resolve acquired NPA [non-performing asset] accounts by potentially sacrificing the net AUM [assets under management] growth. This has consistently yielded results that outshine industry standards. As of March 2023, our successful redemption of over 50 per cent of issued security receipts has significantly surpassed the industry benchmark of 44 per cent reported by CRISIL. Looking ahead, we remain committed to continuously elevating these standards. Our acquisition strategy will continue to prioritise full-cash deals, backed by distressed fund investors. This not only fortifies our portfolio but also underscores our dedication to delivering maximum returns for our stakeholders. 

Our primary strategy for stressed accounts involves turnaround plans. After the Covid-19 pandemic, there has been an uptick in consumer spending, particularly evident in the hospitality and real estate sectors. This has resulted in a higher volume of deals in these industries. However, the valuation of hospitality and commercial real estate assets remains a crucial factor during the acquisition process.

The persistent challenge of price disparity between the selling banks and the acquiring ARCs is an industry-wide concern, with Omkara ARC being no exception. Nevertheless, there has been a noticeable maturation within the market. Both buyers and sellers now possess a more refined understanding of market dynamics. A positive development is the active engagement of qualified buyers (QBs), which adds depth and sophistication to the transactions. This broadens the pool of potential buyers and brings specialised expertise and resources into play, facilitating smoother negotiations and potentially reducing price disparities. As the market continues to evolve and stakeholders adapt to these changes, we anticipate a more streamlined and efficient acquisition process, ultimately benefiting all parties involved.

The higher recovery rate of retail NPAs, coupled with the favourable risk-reward ratio, serves as a significant motivation. Despite our recent entry into the retail asset acquisition arena in 2021, we have achieved a commendable 43 per cent success rate. We are developing in-house infrastructure and expanding our skilled manpower in this domain. Additionally, we are investing in IT systems capable of handling large volumes of NPA loan portfolios. Collaboration with external partners is also under consideration to bolster our resolution capabilities in the retail NPA sector.

While it’s true that the industry is currently navigating challenges, particularly with the market favouring sellers, we don’t view this as a significant threat. We remain optimistic that the market possesses ample supply. Moreover, we see an opportunity for improvement in the supply chain, particularly by expanding the eligibility for more financial institutions such as mutual funds, insurance companies, and alternative investment funds to sell accounts to ARCs. This broader mandate would yield mutual benefits for both parties.

A majority of potential sellers, particularly public sector banks, prefer selling NPA loans on a 100 per cent cash basis. This preference extends to ARC as well, for several reasons. Cash deals allow limiting the ARC’s investment to as little as 2.5 per cent, as per the RBI circular issued in October 2022. Cash deals offer more flexibility in the resolution process. Because of their lower valuations, compared to deals involving SRs [security receipts], cash deals are favoured. At Omkara ARC, we prioritise all-cash deals, as distressed asset investors are willing to participate alongside us. This offers superior rewards.