NPAs help! Arcil to buy Rs 2,500 cr stress assets in FY13

Saikat Das
moneycontrol.com

This is one platform where mounting non-performing assets create an opportunity. Asset Reconstruction Company Ltd (ARCIL), the country's largest entity in the business of buying bad loan portfolios, is all set to scale up its business manifold. According to P Rudran, the new managing director & CEO of the organization, it is eying stressed assets of around Rs 2,500 crore in FY13 compared with less then Rs 100 crore assets bought in FY12.
"We have started talking with banks for buying their stressed portfolios. Many large public sector banks have showed interest. We had a lull period last year. So far in FY13, Q1; we have not acquired anything due to annual account closing. However, we will start acquiring assets from Q2 onwards. We should at least acquire Rs 2,000 corporate portfolios while Rs 500 crore would through retail assets," he told moneycontrol.com.
Arcil currently enjoys more than 70% market share in the asset reconstruction business. It is in talks with a Mumbai-based PSU bank trying to sell 17 stressed assets worth around Rs 500 crore. It has already made an offer valuing those portfolios but response is yet to come from the bank. In FY11, it had acquired more than 1,300 crore. What is ARC model?
Asset reconstruction companies (ARCs) acquire stressed assets from banks at a mutually agreed upon price and then recover it from the loan borrowers and thereby earn commissions from such recoveries. This can happen in two ways: either an ARC directly buys assets from a lender by paying cash or issue security receipts (SRs) to purchase the same.
SR is a kind of security to be subscribed by select qualified institutional buyers including banks. As and when an ARC recovers loans, it repays back to those SR holders. In case of more than expected recovery, the latter gets incentives and vice-a-verse. The price issue between banks and ARCs
The disagreement over price of loan portfolios was one of the main reasons that led to a lacklustre ARC market in FY12. While banks wanted a direct cash transaction, most ARCs insisted on SRs.
"When banks and ARCs are not certain of the value of the property (collateral), SR is the best instrument as it is rated as well. Banks remain interested and invested in SR schemes. Cash dealing is not a problem when both agree over a particular price," Rudran said suggesting that for every transaction, there should a joint forum involving representatives both from bank and ARC to sort out price.
The Financial Stability Report (FSR) of the Reserve Bank of India (RBI) released in June, states that NPAs grew at 43.9% as on March 2012. According to Crisil, banks are likely to restructure around Rs 2 lakh crore loans by March, 2013. RBI frowning at ARCIL in FY12
Rudran took charge of Arcil from April 24, 2012. In the last one year, it was facing some issues ranging from RBI's frowning at its accounting practices to Fitch downgrading ratings from A+ to A- with negative outlook.
"It was not as severe as made out in the media. There are several practices of accounting. Without recovery you are showing the income under accrual basis in anticipation that it will happen in the future while income is recorded as and when recovery happens. It was an issue of accrual or actual basis," Rudran explained.
"We had not done anything offensive but it is prudent to following the recovery basis from accounting point of view. RBI however did not ask us to change. Last year we took a conscious decision to follow the practice of recovery basis accounting."
 
Arcil is presently not looking for any ratings by any agency as it does not have any borrowing requirement.
"We are comfortable with our cash position. We are a Rs 1,600 crore networth company with Rs 324 crore share capital," he concluded.
saikat.das@network18online.com