Exclusive interview | Arcil MD & CEO Pallav Mohapatra says stress seen in retail, MSME segments; ARCs must prepare

Banks and ARCs often blame each other for a lot of things going wrong. Now you’ve made the transition from a banker to an ARC chief…

On my part, I have never blamed ARCs. The only thing we would see as bankers when we did the quarterly reviews with ARCs was that the investment redemption by the ARCs used to be very low. The reason for that was whatever recovery came, as per the waterfall income, ARCs would first adjust it against the expenditure and management fee and then if anything was available, it used to be distributed to the SR (security receipt) holders. That means the focus of the ARCs was to earn income from the asset management piece rather than to earn income from the settlement of assets, which is the upside. My focus is to earn from the settlement of assets because that was the major focus of formation of the ARCs. I want to change some of the business models of the ARCs and to take the resolution path instead of going for the same old things that banks do, such as action under Sarfaesi or DRT (debt recovery tribunal). If we can make recoveries through restructuring, and that too, outside the NCLT, then I will feel that I have achieved something.

When you speak of change in business models, what could that entail?

There are four-five ways to do a resolution. One is to sell the assets through Sarfaesi action. The second is to do something through the DRT. The third is to restructure the asset along with the promoter or with a change in management, either outside the NCLT or within it. In our experience with NCLT cases, we have seen that if a lender is able to restructure the asset outside the NCLT, the chances of recovering more money are higher than what one can get in the NCLT. The reason is that in NCLT, everyone knows that if it is not resolved, it is going into liquidation. I am looking for people who know underwriting, who know the art of appraisal of a loan. They will be in a better position to do the restructuring, both inside and outside the NCLT.

Covid led to the collapse of a few deals in the stressed assets space last year because due diligence could not be done in the traditional way. Are ways of doing business changing?

It is changing in the sense that the physical inspection or physical aspect of due diligence in this particular period is difficult because of all the restrictions. But, to do a resolution, 20-25 percent is physical due diligence and 70-75 percent is basically data analysis from an authentic source, which is the data room. Resolutions have fallen through, but my view is that if the focus on the data part is intensified, many of these deals can still be done.

Are ARCs and other players in the market having to upgrade infrastructure?

As of now, whatever existing infrastructure we have -- human resources and technology -- we can manage, but in Arcil, we have to do a lot on the technology part. My assessment is that in the times to come, the business opportunities in the corporate sector will not be that much as in the retail and MSME sector. In the case of retail, it will be a volume game, which means that the number of cases will be high and the ticket size will be low. Same is the case with the lower end of MSMEs. Their technology will play a very important role and as digitisation of banks has been done, there is ample scope for digitisation at ARCs, where the decision-making, the MIS compilation and everything else should be done by the system. There should be very little input.

Do you have the wherewithal to handle retail and MSME stress?

I don’t know about other ARCs, but in Arcil, we need some of the infrastructural elements. That’s the reason I'm in discussion with fintech companies on a daily basis as also rating agencies and CICs, or credit information companies. It is now going to be system-driven and artificial intelligence-driven, which will give us predictive analysis and also the behaviour pattern of the portfolios. The same old method of handling these assets will not work. We will have to change our approach from the one used for corporates and the brick-and-mortar outfits will also not be helpful. These systems will be in place both for acquisition (of assets) as also for collections.

Banks have of late been selling retail and MSME assets. At what stage of the loan cycle are these coming to ARCs?

So there are three categories here -- public sector banks, private banks and NBFCs. From public sector banks, it typically comes around the time of slipping into the doubtful category. They never sell it at the SMA (special mention account) stage and try not to sell it at the substandard stage but at the doubtful stage, they come for the sale. The private sector is a little more progressive. They may do it when the asset enters the first bucket of NPA, which is substandard, but NBFCs try to sell it at the SMA stage. Most of the public sector banks, as of today, are not going for any structured deals. They are asking for 100 percent cash. The private sector does a mix of these. NBFCs are willing to do a 15:85 structure because the RBI regulation for banks on making full provisions against SRs in such deals does not apply to them.

The National ARC is being set up to aggregate corporate bad loans from banks. Does that mean existing ARCs will not function in that segment for now?

What you are saying would theoretically mean that we cannot participate in the Rs 500 crore-plus assets. Then we would have to work with assets below Rs 500 crore. These are the assets which will generate a lot of business for ARCs and most of the defaults are going to happen in this particular segment. Most of the lumpy assets have been dealt with either through liquidation or resolution; very few of them are left. The only sector where there could be some headwinds in the coming months or years is the large NBFCs because they are facing collection issues amid the lockdowns. They have taken loans from banks, and that is the only large segment where there may be defaults in future. In the last few years, there has been no new capacity built in the power sector or infrastructure other than roads. I consider roads to be a very good sector because it is based purely on cash flow-based security.

So no concerns around NARC?

I also don’t have an answer to one thing. What I have heard is that most of the public sector banks will be shareholders in the NARC. They will be selling assets at the net value, which is the gross amount minus provisions. It is also said that there should be price discovery, so there will be a Swiss challenge. Now if these assets are to be sold on a 100 percent cash basis to NARC, then the Swiss challenge can happen. But if it is sold in some structured form, with SRs involved, and if the SRs have sovereign guarantee, then I don’t know how the Swiss challenge will work. In that case, the pricing given by the other ARCs in the Swiss challenge has to factor that (sovereign guarantee) in.