‘ARCs could get into fee-based resolutions from here on’

Asset reconstruction companies (ARCs) could consider going for fee-based resolutions of assets without buying them from banks, RK Bansal, MD & CEO, Edelweiss ARC, tells Shritama Bose. The retail non- performing asset (NPA) market could be worth Rs 10,000 crore in FY22, he adds. Excerpts:

How was 2020 for the ARC market and to what extent did Covid affect dealmaking?

Covid has affected the financial sector more, especially the NBFC space. It has also affected banks, but because of the moratorium and restructuring, the impact will get reflected in Q4. In the ARC and distressed assets space, not many deals could happen because pricing could not be determined properly. So both in terms of recoveries and acquisitions, the ARC industry has been affected. Two things happened. One, some of the deals the industry and stressed funds were about to close in March could not be closed.

For instance, a bank had given offers in three power projects — Coastal Energen, JITPL and GVK Goindwal Sahib. They withdrew the offers in all the three cases. Even we had two-three deals about to close in March, but in our case it didn’t fall through, but got delayed by eight-nine months. Some of these power deals have fallen through because investors were not sure about the impact of Covid.

Most of the assets being canvassed by banks right now involve the Swiss challenge route, against an offer from the promoter. What does that tell us about the state of the market?

The stock of NPAs is mainly made of infra assets. We need to remember three things here. One, most of these cases now already have 100% provisions. Two, IBC came in 2016. Three, banks have been getting capital from the government. ARCs were originally supposed to have a fee-based business model. After the RBI brought in changes in regulation, with ARCs being asked to bring in 15% cash, and banks not having provisioning benefit by selling under the SR structure and preferring cash, it has gradually become a cash-based model. ARCs don’t have that kind of funds available to buy these assets in cash. So you see fewer deals happening.

Swiss Challenge auctions are happening where the borrowers are working along with the banks or ARCs to settle with the banks. Some money is put in by the borrowers by sale of non-core assets and some comes from the ARC or stressed fund. The offer is given to the bank, which puts it on Swiss Challenge for proper price discovery and transparency, especially because they are PSBs. So, these auctions are happening where the promoter sees more value but the other investor may not see much value.

What do you expect the volume of retail NPA sales to be? What is the pricing like?

Since retail lending has grown rapidly in the last five years, some ARCs like ours have built capabilities to resolve retail NPAs, anticipating a rise here. Retail assets are now nearly 50% of all loans. If you exclude the agri loans which banks don’t sell, you have a Rs 30- lakh crore book which is retail. If you take a 2% NPA ratio, it comes to `60,000 crore. Not many PSBs sell retail loans. Private banks, NBFCs and one or two PSBs are present in the market. Our estimate is this market should become worth Rs 10,000 crore in the next financial year. In FY21, deals worth `6,000-7,000 crore may happen.

In housing loans, the pricing could be 50-70 cents because these are secured. In unsecured personal loans and credit card loans, the price could be as little as 5-20 cents, depending on how old the NPA is. The chances of recovery from a personal loan are better when it is a new loan. In the LAP book, pricing could be 40-60 cents. Pricing also depends on whether it is a cash deal or a security receipt deal under the fee-based structure. This market will expand, and we have been investing in our team and infrastructure.

What is your outlook for 2021?

There will be more cash deals and there could be some under Swiss Challenge, which are borrower-led or promoter-led. That will be good for the banking system as it will allow the asset to be settled and resolved. There could be some smaller/structured deals under the 15:85 structure, where banks/ NBFCs expect large upside but they may not get that value today in cash and the third set will be retail deals. There could also be an opportunity for ARCs to offer their services to resolve some tough/large cases under a fee-based system without buying the asset. These could be pure fee based or a recovery-based incentive model.