Asset reconstruction companies to step up bad loan purchases in Q4

Improved resolution climate and commercial compulsions force banks to clean up their books

Asset reconstruction companies (ARCs) are expected to step up purchases of bad loans in the fourth quarter (Q4FY18) as the recovery environment improves and commercial compulsions force banks to clean up their books.

According to ARCIL, a Mumbai-based ARC, banks may put Rs 400 billion of non-performing assets (NPAs) up for sale this quarter. In this financial year so far, major commercial banks either announced or completed sales of Rs 400 billion of NPAs to ARCs.

ARCs had bought Rs 370 billion of NPAs from banks in 2016-17 and 40 per cent of this activity took place in January-March 2017, analysts and bankers said.

Vinayak Bahuguna, managing director and chief executive, ARCIL, said the activity would intensify in Q4. Banks are putting more NPAs on the block and ARCs are also participating in insolvency cases at the National Company Law Tribunal, where over 400 cases are being heard.  

Krishnan Sitaraman, senior director at credit rating agency CRISIL Ratings, said activity was expected to pick up in the current quarter due to an improvement in the recovery environment. 

ARCs acquired Rs 90 billion of NPAs in the six months leading to September 2017. 

According to the Reserve Bank of India data, the book value of assets acquired rose from Rs 1,598 billion in June 2014 to Rs 2,627 billion in June 2017. Similarly, security receipts issued by securitisation companies and ARCs increased from Rs 520 billion in 2014 to Rs 940 billion in 2017.

Hari Hara Mishra, director at UV Asset Reconstruction Company, said there was greater willingness among banks to take appropriate haircuts and heightened interest for investment by distressed debt players.  

Public sector bank executives said the tempo for sales of NPAs was  building up. Some banks have issues with their capital requirements and selling an NPA account to an ARC, even at a discount, helps them maintain or improve their capital. Banks have made appropriate provisions for these NPAs over time and are willing to sell them at a discount.

Again, some ARCs have a significant exposure in a stressed company and in certain cases it makes sense that one ARC consolidates several banks’ credit exposure to the company. Edelweiss ARC is the fifth-largest lender to Essar Steel after having bought its NPAs from HDFC Bank, ICICI Bank, Axis Bank, and Bank of Baroda.