ARC markets see bold moves by newer entities

The sale of two big sets of stressed loans, of Bharati Shipyards (Rs 8,000 crore) and Hotel Leelaventure (Rs 4,000 crore), is changing the pecking order in the asset reconstruction segment.

Aggressive purchases by Edelweiss ARC (Bharati Shipyards) and JM Financial ARC (Leelaventure) in the June quarter have raised temperature in this space. The race to grow asset books might lead to new asset reconstruction companies (ARCs) overtaking the older one, Asset Reconstruction Company (India) Ltd (Arcil). The activity began to hot up last financial year (2013-14), as asset purchases grew a little over threefold to Rs 27,000 crore in FY14 from Rs 8,000 crore in 2012-13, according foreign brokerage Credit Suisse.

Banks' estimated sales of non-performing assets (NPAs) might more than double in 2014-15, to cross Rs 50,000 crore, said Credit Suisse.

Edelweiss ARC is believed to have acquired assets worth Rs 8,900 crore in 2013-14. ARCIL picked up assets worth Rs 4,300 crore. The chief executive of a large ARC said all entities had grown their books, as banks stepped up asset sales in FY14. But it is also throwing up challenges such as capital raising and pricing of assets.

The Reserve Bank of India, in its Financial Stability Report issued last month, had expressed concern over the risks of evergreening of books, the term for giving new loans to repay old ones. While entering into an NPA purchase transaction, ARCs pay a small part in cash upfront, perhaps five to 10 per cent of value. For the other 90-95 per cent, they issue security receipts (SRs). There are concerns over the ability to make recoveries from bad loans and paying banks who hold SRs over a period, said the RBI report.