Bad-debt pioneer Arcil has sobering advice for India's toxic asset buyers

Be prepared to stay for the long haul and deal with multiple setbacks, he said

As local and foreign investors line up to pick bargains out of India’s $207-billion bad loan debacle, one of the country’s most seasoned managers of distressed assets has some sobering advice: Be prepared to stay for the long haul and deal with multiple setbacks.

 

“Managing many of these complex assets on a day-to-day basis is going to be very tough, as this is not a market where you can just jump in and out and make money,” said Vinayak Bahuguna, chief executive officer of Asset Reconstruction Company (India) Ltd, which has been buying bad loans for about 15 years.

 

India is embarking on its most far-reaching effort to break up distressed corporate borrowers and resolve soured debts, and global money-management titans from JC Flowers & Co to Apollo Global Management LLC are eyeing investments. The clean-up will not only test India’s legendary bureaucracy and its newly-restructured courts system; it must also overcome some business owners’ determination to frustrate any attempts to auction off their assets on the cheap.

 

Few executives know more about the potential pitfalls than Bahuguna, who has had a 30-year career in banking, including a stint managing distressed loans in India and Africa at Standard Chartered Plc. Arcil has bought bad loans totaling Rs 81,500 crore ($12.6 billion) since it was set up in 2002 as India’s first asset-reconstruction company, backed by ICICI Bank Ltd and other large lenders.

 

Indian insolvencies take longer to resolve than in any other major economy, and only in Brazil do creditors typically recover less. Overall, India is No. 103 in the World Bank’s ranking of how nations handle insolvencies, just behind Nicaragua.

 

All this adds up to the need for an experienced local partner to help navigate the Indian system, Bahuguna said. “If you are looking at more than one opportunity here, then a local foothold is important,” he added.

 

Over the next year, the assets and debt of about 50 of India’s biggest defaulters may be sold off by court-appointed professionals, a process in which banks are expected to take deep haircuts on their loans. The companies’ borrowings total an estimated Rs 3 lakh crore, close to one-third of total recognised bad loans in India’s banking system.

 

The bankruptcy courts are due to rule on the first twelve of those companies — known locally as the “dirty dozen” — in the first quarter of 2018. After being overhauled by the government last year, the courts are supposed to speed up the lengthy insolvency process.

 

Billionaire Uday Kotak, India’s richest banker, in an interview this month called the investment opportunity stemming from the process a “once in a lifetime event,” and said that sovereign wealth funds and global pension funds have expressed interest. Canadian pension fund Caisse de depot et placement du Quebec and Brookfield Asset Management Inc. have publicly said they may invest in Indian stressed assets.