By Mahesh Nayak
The government-backed National Asset Reconstruction Company (NARCL) entry into the asset reconstruction business is driving out private companies in the space, especially those backed by global funds.
“ARCs are struggling to compete with NARCL following the sovereign guarantee on the security receipts (SRs) issued by the firm towards acquiring non-performing assets (NPAs) has been the biggest dampener, and also, one of the reasons for global funds and Indian ARCs winding up their ARC business in India,” said a CEO of a private ARC on condition of anonymity. NARCL offers a 15:85 structure—15% upfront cash and 85% in sovereign-guaranteed Security Receipts (SRs)—making it a safer and more attractive option for banks compared to private ARCs.
This has seen a slew of exits by global funds. For example, Varde Partners, which had a joint venture with Aditya Birla Capital in Aditya Birla ARC, has exited the space. Similarly, Bain Capital, along with its joint partner Piramal, surrendered its ARC licence in November. Earlier, Arcion Revitalization, a joint venture between Apollo Global and ICICI Bank and Lone Star India had pressed the exit button.
Others like Avenue Capital-backed ARCIL are also seeking an exit via an initial public offering (IPO) of the ARC. There are talks that Arcil plans to list itself soon. Avenue Capital holds close to a 70% stake in the ARC, while Lathe Investment, a subsidiary of the Government of Singapore Investment Corporation, holds 5% in the ARC.
However, Aditya Birla Capital is managing the existing assets and planning to focus on the retail bad loan business. On condition of anonymity, a senior official from a private ARC said, “The business (ARC) was no longer lucrative, which is why Piramal and Bain continued to run the IndiaRE Fund but surrendered the ARC licence.”
“There is no longer pressure on PSU banks to sell their bad assets,” said the CEO of the private ARC. For banks, especially public sector banks, it has been a no-brainer as to why negotiate with private ARCs over pricing and recovery timelines when NARCL offers a safer bet. “We are left with few or no assets from the remaining pie,” said a CEO of an ARC who has a minimum threshold to pick assets. He explained that global funds prefer large-ticket/value assets and do not touch assets of low value.
As a result, private ARCs are struggling to compete, and the ARC business has slowed down. The distressed asset pool has also shrunk, with gross NPAs at a 12- to 13-year low. The draft guidelines on securitisation have further impacted ARCs, allowing banks to bypass them entirely and securitise NPAs directly through special purpose entities (SPEs). The distressed asset pool itself has shrunk—gross NPAs are at a 12- to 13-year low at 3% from 11%, and what remains is increasingly being routed to NARCL.
Currently, JC Flower and Encore Capital are the other two global players in the Indian ARC market. ARCs are also changing their business model, focusing on retail assets and building capability to handle them. However, unless regulatory parity and operational flexibility are restored, private ARCs may continue to exit or pivot to niche roles, leaving NARCL to dominate the distressed asset landscape.