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| `Longer slowdown will impact profits` | | Q&A: S Khasnobis |
| Shilpy Sinha & Sidhartha / Mumbai Jul 27, 2008, 04:07 IST |
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 While a slowdown has dawned on many only now, Asset Reconstruction Company (India) or Arcil had started preparing for it months ago. The company is in the midst of bolstering its capital base to deal with the expected rise in bad debt and the sale of such loans by banks and financial institutions. Arcil Managing Director and CEO S Khasnobis spoke to Shilpy Sinha & Sidhartha about the company’s plans and the impact of the slowdown on banks and companies such as his. Excerpts:
Do you see bad debt rising and a return of the mid-nineties kind of a situation?
If the slowdown lasts for a short period, say, one year or so, then there will not be much impact in terms of impairment of assets. But if it stays for a longer period, there will be pressure on profits and net interest margins and a consequent rise in non-performing assets (NPAs).
But I do not see a situation similar to the mid-nineties when there was accumulation of NPA stock. Now, the system is more or less cleaned up with the level of net NPAs much lower at below 2 per cent compared to 12-13 per cent then. But if the problem persists, it may affect the ability of banks to write off and the loan loss coverage. An inadequate level of loan loss coverage reduces the ability to sell. But if you allow assets to deteriorate, the value goes down. Metaphorically, it is like you were selling ice-cream and ended up selling milkshake.
So, your business will not grow too much in the coming months?
Per se, NPA creation does not grow our business. Growth in our business will depend on the desire of the banks to sell and our ability to pay cash.
Are there elements in the regulatory set-up governing ARCs that need to be strengthened further?
One issue is fund-raising. Today, we can raise only 49 per cent in a trust from foreign institutional investors (FIIs), with a sub-cap of 10 per cent on each FII. The remaining 51 per cent has to be raised domestically. Recently, the Reserve Bank of India allowed non-banking financial companies (NBFCs) to participate on the domestic side by investing in securitisation receipts (SRs).
This has eased the fund-raising ability. But it is not as if NBFCs are queuing up. Each investor, who holds 10 per cent, wants a control of the asset and does not want to be a passive investor. If 51 per cent is made 74 per cent, it makes a lot of sense.
Are you short of cash?
We need cash because banks are required to provide fully for impaired assets in four years. We are raising Rs 1,000 crore through a rights issue and private investment by mid-September. Our equity base currently is Rs 220 crore and post-allotment it will be around Rs 330-350 crore.
At present, we operate with a debt equity ratio is 1:1 and plan to raise some debt later. We will have net owned funds of around Rs 1,500 crore. We are also planning a fund of $500 million to $1 billion.
What kind of assets are you acquiring?
Our core assets are manufacturing assets, including restructuring and rescheduling. Real estate assets are incidental. Real estate has become valuable and therefore it makes sense to capture value by selling it. In smaller assets, it is just the reverse since there is hardly any opportunity in the SME segment for workout.
We have acquired Rs 1,000 crore retail portfolio, but we have to prove our capability on the ground. It will take a year for us to do that and to enable banks to rely on us (in that segment). We do not want to deal with unsecured loans.
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