The supply of corporate NPAs has come down. What is the outlook for the business?
There are still business opportunities in the corporate book because there are assets, which have slipped into NPA a few years back and are either still in the National Company Law Tribunal (NCLT) or about to go to NCLT or even things happening outside NCLT. We are looking at those assets wherever we see a good possibility of recovery. Fresh slippage is not happening at the rate it was happening earlier but those which have slipped into NPAs earlier have not been resolved 100% which is a segment where there is an opportunity. The other segment is some assets, for example in the IL&FS case, which were categorised as ‘red’ based on the solvency rate and cash flows. Such difficult assets can be acquired by ARCs (asset reconstruction companies) at a discount which means debt levels will come down and servicing capacity with the same cash flow may go up. ARCs can give a longer time frame for repayment which will improve the ability of the existing cash flow to service the debt at that particular time. We can also use strategic investors to come in and pay off the debt. ARCs have also now been permitted to apply as resolution applicants which means they can acquire assets in association with strategic investors through the NCLT process. All these are different business opportunities for ARCs.
What about the retail business?
In retail, the type of loans coming up are unsecured – mostly personal loans and credit cards. These are available at a deep discount. If an ARC has a strong IT platform it can use analytics to drive recovery which could be more than the acquisition price, which is normally between 10 and 15%. If they can make a 20% to 25% recovery, they have a clear upside and by using technology it means they are doing it at a lower cost too and collection efficiency also improves. Arcil started by acquiring secured retail loans where the recovery has been very good. Now ARCs are moving towards unsecuredness, which is also showing encouraging signs.
For example in cases where ARCs have bought microfinance loans from banks or MFIs where the collection remains with the selling institution, the recovery rate has been seen to be very good. These assets have also been acquired at a deep discount to the principal. In mortgages, 90% to 95% of the portfolio is giving a redemption which is more than the SRs (security receipts). On a full-year basis in some cases, I am getting an upside of more than 100% of the portfolio because they are acquired at a deep discount. The ticket size for secured loans in retail is higher so growth will come from there though we are now seeing a lot of supply of unsecured loans.The new RBI circular for ARCs has allowed co-investors. How do you see these changes?
The RBI has addressed the liquidity issue for ARCs by allowing them to invest 2.5% in cash but it is applicable only when there is a co-investor. In case ARCs are offering SRs, then they have to compulsorily put in 15% cash. A co-investor comes because he sees some value in the asset. He is investing because he wants to have a return on his capital. ARCs earn a management fee in the SR structure which ranges between 2% and 5%. But in the case of a co-investor structure, the management fee will not be more than 1% because the investor is not a lender. Banks may pay a higher management fee because their NPAs are coming down. But despite the lower management fee, the return on investment is high. But if there is a possibility of redemption, the ARC’s upside is limited because it gets only 2.5% of it.
The guidelines have also made changes to one-time settlement.
There is an independent advisory committee (IAC), which will go through one-time settlements. This committee will give their comments which will have to be seen by at least two independent directors. It will be more time-consuming because there is no threshold for it. The association has represented to the RBI that it is time-consuming. For the board and the committees to go through even smart ticket proposals will put time pressure on them. So there should be a threshold or timeline which will speed up things.
Liquidity for ARCs has been an issue for long with banks not keen to lend and debt markets not very open in India. What is the solution?
Banks have always lent against SRs. In the past redemption was not happening at the level where banks were comfortable with the monetisation from SRs. Banks were obviously reluctant to give loans or limits when they were not seeing any liquidity in the securities. But now it has picked up, so most probably banks will now look at giving loans against SRs. Banks will of course look at the rating of the ARC, the SR redemption track record and also whether the ARC is focused on SR redemption or it is only interested in earning the management fee. ARCs will also have to get a rating on their bond issuance which will help raise money from the market. I do not see liquidity as a problem if the business model of the ARC is focused on the reduction in the NPA which ultimately means redemption of SRs.
