Assets should ideally be churned within five yrs: Arcil's Pallav Mohapatra

In a Q&A, the MD & CEO of the firm dwells on its business model and the focus on retail assets to drive volume, going forward

The current financial year was a good one for Asset Reconstruction Company (India) Limited, or Arcil, in terms of acquisitions and recoveries. Speaking to Manojit Saha & Subrata Panda in an interview, Pallav Mohapatra, MD & CEO of Arcil, dwells on the firm's business model and the focus on retail assets to drive volume, going forward. Edited excerpts:

How has the financial year been for Arcil?

A good business model for asset reconstruction companies (ARCs) on a long-term sustainable basis, is “acquire and recover”. When you follow this model, you makes money on both, the acquisition and redemption. So the returns go up. But if you hold on to the asset for long, you may make money on accrual basis. The trouble is that 100 per cent provisions have to be made after eight years if you have not recovered the outstanding. In such a situation, the accrued income and its subsequent reversal after eight years doesn’t make a good business model.

In FY22, we (Arcil) made acquisitions of Rs 2,400 crore and recovered Rs 2,200 crore. In FY23, we will acquire 75-80 per cent more than what we did in FY22. And, recoveries will be around 65-75 per cent of the acquisition number.

How long do you look to hold on to the asset before you sell it off?

The asset should be churned in 2-3 years. But this may not be possible in all cases. So, ideally, the asset should be churned within five years.

Are you acquiring only NPAs or is there some SMA (special mention account) in your portfolio?

We are acquiring SMAs also. But as of now, the share of SMAs will be hardly 2-3 per cent. Banks do not sell SMAs. NBFCs do, but very selectively. The acquiring price for SMAs is higher than NPAs because most SMAs are operating assets.

What is the composition of your portfolio?

In terms of value, corporate assets will be more than retail assets. But we are now focusing more on retail and MSME, where it is a volume game. The income or revenue we generate will depend on the volumes we have. Hence, we are changing our business model, making it more technology-based than manual. In the next two months, we will have a retail IT platform that will be automated end to end. This we will take to the corporates as well.

What kind of haircuts have banks been comfortable with while selling the accounts?

The haircuts depend on a few factors – whether the corporate is an operating entity, whether it is a cash flow-based asset, whether it is heavily collateral, immovable asset, etc. If it is a cash generating asset, the acquisition price will be higher. It will range between 70-80 per cent of the principal outstanding because the cash flow is certain.

How do you see the asset reconstruction business in FY24?

From a volume point of view, the market is huge because more and more MSME and retail will come. But from a value perspective, it is not that much.

Are banks selling retail assets?

As of today, NBFCs are ready to sell both mortgages and unsecured retail assets. Banks are more comfortable selling unsecured retail assets. But they are holding on to their mortgage assets. Normally, for unsecured retail assets, at the most the acquisition price can go up to 25 per cent of the outstanding principal. On average, they are 10-12 per cent of the principal.

Now that ARCs have been allowed to bid for resolution of assets under the Insolvency and Bankruptcy Code, will that interest you?

Our approach will be to have a strategic investor while bidding for such assets. If they come along with us, we will become the resolution applicant and give the plan. If our plan is approved, we will hold on to the asset for some time and then it will be taken over by the strategic investor either through refinancing or restructuring of debt. In both the cases, we will benefit because if it is refinanced, our capital will be churned and if it is restructured, then I will get income over a period of time. However, in case we are bidding with some financial investors, then they again will have to look for a strategic investor. Esssentially, we do not want to hold on to the asset for long as its owner. The reason is we are not in the business of running businesses.

How do you see competition from National Asset Reconstruction Company Ltd (NARCL)?

I don’t see any competition. If I am able to build up a parallel of strategic investors, I can outbid them for some assets.

With NARCL, will the ARC sector be rejuvenated now?

Yes, because now the strategic investors will be looking forward to partnering with ARCs to bid for assets. The ARCs will make the bid, but they will come in as a core investor.