IARC plans Rs 500-cr fund for NPAs

International Asset Reconstruction Co (IARC) is planning to float a Rs 500-crore debt fund to purchase non-performing assets (NPAs).

The lending agency is working towards floating a domestic fund and plans to raise the corpus in the current financial year itself, according to a senior IARC official. The business plans for the proposed fund, which is likely to be foccused on industrial assets, are still in the works.

After witnessing high growth in corporate credit for four years, the demand for industrial credit has come down sharply along with the rise in risk of defaults.
 

BLEAK TIMES Gross NPA projection for various bank groups (in %)
Bank group	FY09 E	FY10 E	FY11 E
Public sector	3.00	3.50	4.20
New private	3.30	4.00	4.60
Foreign	3.00	4.00	4.70
All banks	3.00	3.70	4.30
Estimated gross non-performing assets (NPAs) to gross advances at end of March Source: RBI and CARE estimates

 

According to rating agency CARE, the share of corporate advances (industry plus the service sector) will be higher than retail credit in the total loan book. In the current economic downturn, gross NPAs for corporate advances would be higher in magnitude.

The gross NPAs to gross advances of the Indian banking system may increase from 2.3 per cent at the end of March 2008 to 4.25-50 per cent by March 2011. There was a possibility of high NPAs, which were suppressed under the shadow of restructuring, it added.

Asked about the profile of investors for debt fund, the official said it could be a mix of domestic institutions and foreign bodies. According to regulatory norms, foreign investors can contribute only up to 49 per cent to the fund corpus. The maximum life of the fund is limited to five years.

One senior public sector executive said the NPAs sale might gather steam this year on improved resource conditions in the market and also because banks are keen to contain NPA levels in their books.

At the beginning of 2008-09, many banks had planned for the sale of bad loans. But tight liquidity in the markets, following the global financial crisis in September 2008, forced them to put their plans on hold.

IARC had become active in 2008-09 and has acquired NPAs of over Rs 150 crore. It had raised Rs 15.98 crore in the first round of funding, required to augment its capital requirements in its asset reconstruction business.

In the second round of funding in November 2008, IARC had raised Rs 90 crore from various investors, including Tata Capital, ICICI Bank and HDFC Bank, taking the total capital raised to Rs 105 crore.