To pursue strategy through its non-performing loan division called Arms.
Valuation disconnects and tough provisioning norms have forced the country’s oldest asset reconstruction company to expand the scope of its business model.
Asset Reconstruction Company (India) Ltd (Arcil), which buys bad loans from banks for cash or security receipts, says banks are increasingly averse to selling such loans. If one reason for fewer deals in the bad asset market is valuation, the other is the central bank’s norms to have 70 per cent provision coverage ratio (PCR).
The Reserve Bank of India has allowed banks to include technical write-offs while calculating the ratio. Technical write-offs are those which, after being written off the bank’s book, can still be chased for recovery from the branch level. According to Arcil, banks are not willing to sell written-off accounts, as they use the write-off amount in PCR calculations.
This has made Arcil don the role of recovery advisor for a fee, as compared to outright purchase of the bad loans. However, Arcil is following the strategy for retail loans only, through its retail non-performing loan division, called Arms. Arcil had launched Arms in 2008, for buying out retail loans from the banks.
“We (Arms) are handling about 60,000 accounts. We are going ahead on an agency basis. That is, we will not buy from the banks but we will do the recovery on behalf of the banks,” said S Khasnobis, managing director and chief executive officer of Arcil.
On why, he said, “That’s what the banks are interested to do. They want to keep the loan where the write-off has taken place, for improving the provision coverage.” Banks are required to adhere to the RBI norm of 70 per cent provision coverage ratio by the end of this month.
Arcil sees the consultancy activity as growing for at least the next year to 18 months.
Khasnobis also indicates that as not much of deals in the stressed asset market are taking place, it may go slow on raising funds. Arcil is planning to raise up to Rs 1,500 crore to fund bad loans buys.
“We got the first closing done, which is Rs 250 crore. We will end with about 1,000-1,500 crore. We are drawing down slowly because not much sale is happening,” he said.
Despite the global financial crisis, which resulted in a rise in stressed assets in the banking system, the asset sale market didn’t geta boost. This is mainly because the Reserve Bank of India gave a one-time dispensation to banks in which they could re-structure bad loans without classifying these as NPAs. Commercial banks’ ratio of gross NPA to gross advances in 2009-10 marginally went up to 2.5 per cent from 2.4 per cent in the previous year, while the net NPA ratio remained flat at 1.1 per cent.