'Risk appetite for microfinance portfolios among ARCs not that high'

In acquisition, we are almost there. And in terms of recovery, if I take the target up to December, we have achieved it, said Pallav Mohapatra, MD & CEO of Asset Reconstruction Company

As stress in the wholesale segment has decreased in recent years, asset reconstruction companies (ARCs) have shifted their focus to acquiring distressed retail assets. With rising stress in unsecured retail loans and microfinance, Pallav Mohapatra, MD & CEO of Asset Reconstruction Company (India) Ltd. (ARCIL), spoke with Subrata Panda about how the ARC sector is preparing for the upcoming retail NPA cycle. Edited Excerpts:

 

How has the year been so far for you in terms of acquisitions and recoveries?

 

The acquisition numbers are much better than last year. And the recovery numbers are on the lines of last year. Last year was not in sync with the normal years because the acquisition was a bit lower. But normally, the gap between our acquisition and recovery numbers for the year is less than 30 per cent. Our recoveries in April-December period will be close to Rs 2,600 crore and acquisition will be around Rs 3,500 crore.

 

What is the target for the full year?

 

In acquisition, we are almost there. And in terms of recovery, if I take the target up to December, we have achieved it. So we are all set to achieve the annual target as well. And in terms of acquisition, we will, in most likelihood, exceed the target we had set.

 

Since corporate sector NPAs have bottomed out, where are you seeing business opportunities coming from?

 

There are opportunities in the retail and MSME space. As of now, secured retail portfolios are coming more from the non-banking financial companies (NBFCs). NBFCs are also selling unsecured loans. Banks so far have not come out with sale of secured retail loans. But some of the small private sector banks are doing it. NBFCs are also putting MSME portfolios on the block. Additionally, very few public sector and private sector banks are also doing it. But gradually, the momentum will pick up.

 

No large corporate portfolios are being sold?

 

In corporate, only real estate portfolios are being sold, and that too by NBFCs. The reason why the banks are not there is because the exposure of the banks in the real estate is very small. And banks are not allowed to do financing of the land acquisition. That’s why the stress in the bank books on the real estate is very low. But NBFCs have been doing it.

 

There is stress in the MFI sector. How are you gauging business opportunities in the segment?

 

So far, I think, the risk appetite for micro finance among the ARCs is not that high. That’s why, except for a few portfolios, not many portfolios are going through. There is a gap in the price expectation from the seller and price ARCs are willing to pay. Secondly, ARCs do not know the nuances of these microfinance businesses. So unless the ARCs build up their capability and knowledge on these types of exposures, they will not come forward to buy. ARCs have to be aware of how these loans are given, to whom these loans are given, whether these loans are actively covered under the credit bureaus, etc.

 

If you have experience with loan underwriting, you understand the types of recovery processes that can occur. Without knowledge of the underwriting involved, it's difficult to effectively manage recovery.

 

What about unsecured retail?

 

So far, not much of unsecured retail assets from the banks’ side has been put up for sale. But it will definitely come. Unsecured retail accounts have some means to pay. And secondly, since their requirement is on a continuous basis, they don't want their credit score to be spoiled.

 

Mostly all the private sector ARCs are focusing on the retail segment…

 

Focusing on the retail segment is fine, but the challenge is that retail requires an initial investment. You need to build the infrastructure before you can handle both retail and low-ticket MSME loans. A major part of the infrastructure needed to manage a retail and MSME portfolio is the IT platform. Although the portfolio amount may be small, the volume is typically high. For secured portfolios, the number of accounts may range from 500 to 1,000, but for unsecured loans, it can run into the lakhs. Now, if an ARC wants to manage these portfolios, it cannot be done manually. They will need to build up their technology platform. Along with the increased volume, comes the rise in compliance costs. Another infrastructure requirement is that ARCs need to open branches.

 

Do you need capital to build up all these capabilities?

 

We want to do 2-3 times the business that we are doing today by 2029-30. We are targeting an AUM of Rs 24,000 – Rs 25,000 crore. So, at some point of time we will need capital.

 

How has NARCL impacted the industry?

 

The impact is whatever they can do, the other ARCs cannot do. However, if we look a bit further, if there is still some value left in the asset, an ARC can leverage that by bringing in an investor who is willing to put money into it. This allows the investor to derive benefits from the asset. If there is a strategic investor interested in the asset and I collaborate with them, and I see value in the opportunity, why shouldn’t I be able to offer 100 per cent in cash?

 

Would you say there is a level playing field?

 

At the end of the day, the government wants the legacy bad loans to be cleaned up. If it is being cleaned up, it is good for the ecosystem. If the private sector ARCs want to remain in the business, then they have to build up their capacity in retail and MSME.

 

How do you see the ARC sector currently and what does the future hold?

 

Those ARCs which have strong capital, strong corporate governance, strong business models which are compliant with the regulations, will survive because regulations will get tougher. RBI is gradually bringing ARCs at par with banks when it comes to regulations because they want to ensure that whatever is moving from banks to the ARCs, the ecosystem should not be impacted in any way.