ARC Unable to Recover Bad Loans

Arcil recovers just a fifth of bad loans Over the last 4 years, Arcil has been able to redeem only 15-20% of security receipts issued, says official Vishwanath Nair-Livemint

Mumbai: India’s first and largest bad loan restructuring firm, Asset Reconstruction Co. (India) Ltd (Arcil), has recovered or written off just a fifth of the loans it bought from banks in the last four years, in another fallout of the economic downturn that has increased stress on the banking system. Arcil issues so-called security receipts to banks for taking non-performing loans (NPLs) off their books. 

When a bank sells an NPL, the asset moves out of its loan book and is classified as a standard investment against the security receipts, freeing it from provisioning requirements. “Over the last four years, Arcil has been able to redeem only 15-20% of the security receipts issued by it,” said an official at one of the institutional investors in the company. 

While Arcil does not put out this data publicly, its filings with the Registrar of Companies (RoC) show that for the financial year ended 31 March 2013, it had security receipts worth Rs.5,564 crore outstanding. Of this, receipts worth Rs.1,204 crore, or 22%, were either written off or redeemed. 

A break-up of the amount written off was not provided. In fiscal 2012, 15% of outstanding receipts were written off or redeemed and in fiscal 2011, this number stood at 24%, the RoC filing showed. “As the economy is experiencing a downward trend, it is increasingly impacting the recovery and resolution efforts of the company,” Arcil said in its balance sheet for 2012-13. An email sent to Arcil on Friday, requesting more details about the company’s financials, remained unanswered as of press time on Monday. 

Foreign investors, such as South African lender Firstrand Bank and Barclays Plc., that have been looking to exit Arcil, are yet to find buyers, said a senior official at Arcil who did not wish to be identified. Mint reported in January 2013 that Firstrand Bank is looking to sell its 4.11% stake in Arcil, which it had bought from ICICI Bank Ltd in 2007 for about Rs.40 crore. 

Barclays owns a 1.5% stake in it. State Bank of India is the largest shareholder in the firm with a 19.95% stake; IDBI Bank Ltd owns 19.18% and ICICI Bank 13.26%. The weak show by India’s largest asset reconstruction company (ARC) highlights the hurdles faced by such firms in recovering bad loans. 

The sale of bad loans to ARCs rose last year as banks tried to keep their reported non-performing assets (NPAs) in check and cut provisions against such assets. The Reserve Bank of India (RBI) has also been encouraging ARCs to play a larger role in the resolution of stressed assets in the financial sector. As of 31 March 2014, the gross NPAs of 40 listed banks was Rs.2.42 trillion, up 34.4% from Rs.1.8 trillion in the year-ago period. 

The track record of the ARC industry, so far, has not been very encouraging, say analysts. A 7 August report by Crisil Ltd put the redemption ratio of securities receipts for the entire industry at 53% over the last 10 years. Redemption ratio is the ratio between security receipts redeemed and the receipts issued by the asset reconstruction industry. 

“Our observation has been that in cases where at least three years have elapsed post issue of security receipts, average recovery has been over 50% of security receipt face value,” said Kalpesh Gada, head-structured finance at credit rating agency ICRA Ltd. According to Pawan Agarwal, senior director, Crisil Ratings, a majority of these redemptions have come from the top four ARCs including Arcil, Edelweiss ARC, JM Financial ARC and Phoenix ARC. 

“This recovery by the ARC industry has not been up to its potential. One of the reasons why the recoveries have not been up to the mark is the age of the NPAs sold by banks. The average age of the NPAs sold by banks till some time back was five years. The more you delay selling the asset, the lesser the value which can be recovered from it,” he said. 

In January, RBI, as part of its stressed assets framework, had encouraged banks to sell bad loans to ARCs earlier in the cycle. This, according to the RBI, would allow ARCs to play a larger role in reviving an asset rather than just focusing on recoveries. 

Another important reason for low recoveries by ARCs is the time required to aggregate the debt in case of multiple lenders. It can take between 18-30 months for an ARC to aggregate the debt which leads to more delays in recovery and reduction in value of the assets, analysts said. Both issues have now been addressed by the industry and the regulator, Agrawal of Crisil said: the average age of stressed assets being sold to ARCs has come down to two years; the time for debt aggregation is also being reduced with banks selling bad assets as a consortium rather than individually. 

But ARCs continue to struggle with legal delays in the recovery process. In his budget speech on 10 July, finance minister Arun Jaitley had raised concerns regarding the increasing NPAs in public sector banks and announced the setting up of six new debt recovery tribunals (DRTs) in Chandigarh, Bangalore, Ernakulum, Dehradun, Siliguri and Hyderabad. DRTs are specialised courts focusing only on debt recovery for banks, while also resolving cases involving borrowers, guarantors or any one aggrieved by a bank. 

Now, there are 33 DRTs and five debt recovery appellate tribunals (DRATs), in India. Meanwhile, the department of financial services of the finance ministry has set up a panel to suggest amendments in debt recovery laws and make them more effective, PTI reported on 30 July. “The whole asset restructuring landscape needs to be thought through in a broader framework to achieve asset resolution in a timely way and value creation for ARCs, lenders and investors. 

Bankruptcy laws, powers available to ARCs and turnaround funds, dispute resolution, etc. need to be thought through in a holistic way so that the landscape attracts the right pools of capital, turnaround management expertise and foreign investment into special situation and restructuring funds,” said Vikram Limaye, chief executive and managing director, IDFC Ltd.

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