Edelweiss ARC saw a jump in NPA acquisitions to Rs 18,251 crore as at September 2014 from Rs 14,106 crore at FY14-end. The company’s managing director & CEO, Siby Antony, believes that until banks price assets attractively, asset reconstruction companies (ARCs) will not buy bad loans going ahead. In an interview with Shayan Ghosh, he says RBI’s 15% upfront payment norm would take the industry towards full-cash transactions and attract foreign players. Excerpts:
How do you see the new RBI 15% upfront payment norm?
It is a huge change — from 5% to 15% — and there needs to be a paradigm shift in the way business is done. Banks have to sell assets at a realistic price; 5/95 is more of a quasi-agency business, aiming to help banks manage their books. So, nothing really changes except that bad loans move from a bank to the ARC, which is an outsourced agency doing recovery for the lender. In case of 15/85, it’s a business for the ARC, as 15% upfront cash is a huge investment for Indian ARCs, which are very moderately capitalised.
How important is it for an ARC to buy an asset at a discounted price from the bank?
Without discount, 15% upfront payment does not work. With a 15% upfront payment and a 1.5% management fee charged by us annually, we are able to get a 10% return. Moreover, if you recover the entire amount, you will get just 10% return — which is actually as low as 7% because the 1.5% management fee comes over a long period. Then, there are expenses incurred by the ARC to transfer the assets — stamp duty and registration charges alongside recovery expenses. If you factor in all costs, the ARC can achieve an annual rate of return (ARR) of 7%, which is not at all attractive. So, more than the acquisition price, how much you can recover is what matters.
In the long run, will the ecosystem benefit from the 15% upfront payment?
It signals a move towards full-cash transactions, which is the global practice. When foreign funds come to India, they would not like to do security-receipt-based acquisitions. They would prefer to buy out the asset, which will be at a deeper discount so that they can be profitable. In all developed countries, full-cash transaction is the norm and nowhere else in the world is there an SR structure. The SR structure is primarily to support banks in NPA management.
Where do you see sale of NPAs for the entire year?
Bad loans in the system are huge and, in the short run, banks can manage NPAs by selling them to ARCs. In the longer term, however, unless the economy recovers, it is very difficult for any recovery mechanism to work. Even corporate debt restructuring (CDR) has seen many cases of package failure as the economy has not yet grown at the expected levels. And in CDR, what you are doing is giving a little more time and some concession to navigate through the difficult period. If the difficult period gets prolonged, it does not work. However, I feel that by March 2015, if banks want to adjust their NPAs, they will have to sell them at the right price — unless it is attractive to ARCs, there would not be any sale.