Arcil slashes bad loan purchase target by 30% to Rs 3,500 cr

By: | Published: November 23, 2014 1:01 PM

Arcil has pruned its yearly bad loan buying target by 30 per cent to Rs 3,500 crore following stricter guidelines issued by RBI...

Leading distressed asset purchaser Arcil has pruned its yearly bad loan buying target by 30 per cent to Rs 3,500 crore following stricter guidelines issued by the Reserve Bank recently, a top official has said.

The pricing of the assets will have to be more “realistic” after the RBI issued new guidelines in August, but Arcil fears that banks may not be amenable to a steep cut in the price offered by asset reconstruction companies (ARCs) even though their bad loans issue is far from over, the official said.

“This year, encouraged by the last year’s sales, we were expecting that a lot of sales will come and that was also proved in the first quarter … but after August when the stake percentage has been increased to 15 per cent by the Reserve Bank, there has been a slowdown,” Arcil managing director and chief executive P Rudran told PTI here.

He said the agency promoted by the top banks has had to cut its target to Rs 3,500 crore from the earlier Rs 5,000 crore for the fiscal.

Rudran said after the guidelines, which ask ARCs to increase the cash component in the purchase of a bad asset to 15 per cent from the earlier 5 per cent, banks should be ready to get lower prices for the assets which they sell.

“The real issue is not 15 per cent. The issue is that there has to be a realistic assessment of the price at which you are selling. If you are selling at the right price, there is no problem,” he said.

When asked if this will deter banks from selling to ARCs, Rudran said, “There is a possibility, banks will say I will not sell at all.”

For the industry as a whole, the asset sales by banks have been at Rs 16,000 crore during the first half, as against the Rs 21,800 crore in the entire FY14.

It can be noted that in the March 2014 quarter, the nation’s largest lender SBI for the first time sold Rs 4,000 crore worth of bad loans to ARCs.

The bank again sold nearly Rs 3,000 crore in the first quarter of this year.

For the banking system as a whole, the bad loan pain is mounting with the first quarter figure crossing 4.6 per cent. According to a report by rating agency Icra, public sector banks’ gross NPAs are estimated to touch 4.4-4.7 per cent by March 2015, as against 4.4 per cent as on March 2014 and 4.6 per cent as of June 2014.

He advocated that banks should look at the net asset value on its books, after deducting the provisioning done for a bad asset, while negotiating the price with ARCs.

“If the net book value of the bank, after provisioning, is supported by the value of the security, they should be able to sell it at the net book value,” he said.

Rudran said it is prudent to sell the assets at a lower price at present, rather than taking a hit in the future through write-offs.

“If it is being sold at a higher value, initially they may not have to take a hit, but after a few years, they may have to take a hit. They have to write off security receipts from their books. It is better not to take a hit later and to do a realistic prices now itself,” he said.

A correction in the prices, he said, “is the only alternative” for the system, which continues with accretion of bad assets even though things are looking up on the macroeconomic side.

Arcil had bought Rs 4,800 crore worth NPAs in FY14 and has clocked Rs 1,000 crore in the first half of the fiscal, with a bulk of it coming in the first quarter before the revision in guidelines, he said.

When asked about the dipping market share of Arcil in purchasing the assets, Rudran said the lower share is due to bulk assets like Bharti Shipyard and Hotel Leela, which got picked up by rivals, and added that this is a “conscious” strategy adopted by Arcil.

“Yes, our market share has come down, we are aware of that, we allowed for that to be come down,” he said.

“We are not conservative, we are not aggressive either. We are reasonable and realistic,” he added.

Rudran said the company, the oldest among 14 ARCs, has assets of Rs 10,000 crore on its books at present but stressed that it is not the assets under management (AUM) but redemption of the security receipts (SRs) through recovery of bad assets or security sales which Arcil is focused on.

“We have given an emphasis on our reputation to redeem the SRs, rather than accumulate more assets on our balance sheet. It is a conscious decision we have taken,” he said.

Rudran, however, declined to share the company’s redemption ratio, saying it is very difficult to compute it.

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