ARCs have bought only Rs 1,500 crore of the Rs 24,000 crore put up on sale by banks in the five months since the RBI asked them to invest at least 15% in securities receipts issued by them on the purchase of distressed assets.
P Rudran, MD & CEO of Arcil — India’s oldest asset reconstruction company — believes the pricing of NPAs is more important that the 15% payment norm. In an interview with Shayan Ghosh, he says banks must price assets more realistically.
ARCs have been saying that banks are not keen to lower their reserve prices and, thus, slowing sales. Are ARCs being selective in their purchases now?
The reserve price is set by banks based on a logic that may not match our analysis. Often, an asset worth Rs 100 crore has a reserve price of Rs 100 crore. At times, the value of the plant and machinery itself is around 50% of the value. However, the realisation from the plant and machinery will be low since the unit is lying closed and, at best, can have scrap value. However, since the ARC must issue SRs for the entire Rs 100 crore, from which it can recover only Rs 50 crore, the SRs will be entirely redeemed.
Since ARCs are investing three times more than what they were doing earlier, they have to be careful. If they are not able redeem the SRs, their reputation will be hit. So, both from the point of view of return on investment and reputation, pricing has to be realistic.
What kind of discounts are you looking for?
The discounts were really low in FY14. While they will vary from asset to asset, purchases can be made at a price of around 50% of the principal outstanding value, provided there is a corresponding security coverage. The method of pricing has to change because sellers should also not be unwilling to sell their bad loans. An increase in discounts to ARCs and a better monitoring of the recovery would lead to better realisations, leading to maximum redemption of SRs. If the asset has a real value, we will recover money and SR holders would get whatever is recovered, including 80% of the upside.
So, are you expecting a pick-up soon?
Whenever there is a regulatory change, there is a change in the market. I believe this is a temporary phase, but it’s too early to predict anything right now as, last year, most bad loan sales came in the second half of the fiscal.
What do you think of the new norm of 15% upfront payment?
Pricing of the asset is more important than the 15:85 rule. If a realistic price is being offered and there in any upside in recovery, 80% of the money goes to the SR holder. Today, if they sell at a very high price and, after a few years, the SRs are not redeemable, then the banks will have to write off the asset.