Discounts on toxic assets up on rising Asset reconstruction companies of bad debt

Jan 23 2014, 13:08 IST
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ARCs are now able to buy assets at a far more attractive discount of 45-50%. ARCs are now able to buy assets at a far more attractive discount of 45-50%.
SummaryARCs are now able to buy assets at a far more attractive discount of 45-50 per cent.

With asset quality deteriorating — both non-performing assets (NPAs) and loan recasts are showing a rising trend — banks are now willing to sell toxic assets at half their value, reports Vishwanath Nair in Mumbai.

Asset reconstruction companies (ARCs), which were earlier picking up such assets at average discounts of just 25-26%, are now able to buy them at a far more attractive discount of 45-50%.

In FY14, bad loans worth Rs 16,500 crore were put on the block, of which ARCs have snapped up Rs 3,500 crore worth, ARC players say. Business is expected to become exciting with another Rs 10,000 crore worth of bad loans hitting the market in the next two months. The bulk of this, not surprisingly, comprises corporate loans — small and mid-level corporates — with just 20% are from the retail segment. After a couple of dull years, ARCs are hoping to grow their books. Compared with Rs 12,000 crore of loans on offer last year, just Rs 2,000 crore was finally bought with banks reluctant to budge on discounts. As P Rudran, MD & CEO, Asset Reconstruction Company (India) or Arcil, says, “Pricing is definitely an issue. We need to be careful since we are aware that banks have made all efforts to recover what they can, so there will be hardly anything left for us.”

The way the deals are structured, ARCs pay 5-10% of the price in cash, issuing a security receipt for the rest. Banks can then redeem these receipts when ARCs start recovering. Should the ARC fail to recover enough to pay the bank what it had promised, the banks loses out. In fact, ARCs have seen low strike rates and banks haven’t really gained too much from such transactions.

“The loans sold to ARCs are typically those where we know we can’t recover much more. That is why not too many deals happen,” a top official at a leading public sector bank observed. If a bank believes there’s a relatively better chance for the ARC to recover the dues, it insists on being paid 15-30% of the amount upfront, accepting receipts for the rest. “In cases where the underlying asset is of better quality, banks tend to offer lower discounts on the net book value and ARCs will need to consider this,” says Siby Antony MD & CEO, Edelweiss ARC.

While State Bank of India is looking to put some R2,000 crore

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