The asset reconstruction industry (ARC) will slowly return to a fee-based model from an investment-based one, feels Raj Kumar Bansal, MD & CEO, Edelweiss Asset Reconstruction Company. In addition, the Reserve Bank of India’s (RBI’s) reduction in minimum investment requirement for asset reconstruction companies will help the ARC industry become a platform like an asset management company, Bansal tells Ajay Ramanathan:
Is there a need for consolidation in the ARC space?
It is a market-led economy. You cannot say that there are too many or too few. In the automobile industry, you will have 20 companies making cars. The Reserve Bank of India (RBI) gives licences to asset reconstruction companies. If they cannot cope up with present norms and present capital requirements, they will have to think of some alternative. It is not a question of too many. Only five have 70-80% business. Now maybe JC Flowers Asset Reconstruction will also become active because of YES Bank but otherwise, all are very small.
ARCs are now witnessing a higher inflow of retail and MSME loans.
With the RBI coming out with asset quality review in 2015, a lot of corporate loans have gotten resolved. Banks resolved a number of cases through the Insolvency and Bankruptcy Code route. We have also resolved a number of cases. Due to this, there are not too many NPAs in the corporate segment in the banking space. Even otherwise, the business for corporate loans has shrunk for asset reconstruction companies. As banks are trying to sell more in full cash, it needs a lot of capital. So, asset reconstruction companies typically do not have that kind of money. So you need stressed asset funds. That is why you are slowly seeing many of the asset reconstruction companies being owned by the funds because the money can come from there. What I am trying to say is that the corporate loan market has shrunk and maybe it is not possible for asset reconstruction companies to buy these big loans in cash. So, we started buying retail loans where you need less capital. We have already invested more than `1,000 crore in retail business.
Do you believe that there should be a financing mechanism for asset reconstruction companies?
Banks themselves can fund but somehow there is a feeling among banks and RBI perhaps that if banks are funding, they are indirectly funding their own sale of non-performing assets. That is the issue. I think because of that, the availability of resources from the banking system is less. So, you have to borrow from the market or stressed asset funds. But stressed asset funds charge a very high rate of interest. That is why we expect to earn at least 20% when we do a deal. This is costly but there is no other go.
How do you see the ARC industry evolving going ahead?
In the 2022 circular, the RBI has reduced our minimum investment requirement to 2.5% of total receipts issued if it is a full payment deal. That will help the ARC industry become a platform typically like an asset management company. We are becoming a platform to provide services to resolve assets for other investors who are investing money. The stressed asset fund which has less presence in India will buy through ARCs, then ARCs will invest 2.5% and get fees. It will slowly become a fee-based business, which was the original intention of the RBI when ARCs were started. There was no investment requirement when ARCs were started for the first time. I think slowly we are moving back to that system.