At a time when banks are coping with increasing bad loans, asset reconstruction companies (ARCs) need more regulatory leeway to raise foreign and alternative investment funding to buy loans, said Asset Reconstruction Company India (Arcil) chief Vinayak Bahuguna.
The capacity of capital constrained ARCs to buy stressed assets from financial institutions has dropped due to declining return on equity.
“For the last 13 years, the average return on equity for ARCs has been below 6 per cent. This is proof enough… Asset pricing is one of the important factors. Many auctions (of bad assets on sale) go unattended,” said Bahuguna, the new CEO and Managing Director of Arcil, the oldest ARC in the country.
Bahuguna said Arcil would be happy to raise about $0.5 billion if it can. From the capital raised previously (over five years ago), ₹1,500 crore remains in its hands.
Amid difficulty in raising capital from domestic players, Bahuguna wants the RBI to do away with regulatory restrictions to facilitate easier capital-raising, especially foreign capital.
“I don’t see the level of sophistication required by domestic players to understand the risks and opportunities in this sector… Our sense is that this solution (to capital raising) has to come from foreign capital. Capital is available overseas and it has to find an opportunity,” he said.
Currently, foreign investors can invest up to 49 per cent via the automatic route, and beyond 49 per cent via the government route in the capital of ARCs. No sponsor can hold more than 50 per cent of an ARC’s shareholding either by way of FDI or by routing it through foreign institutional investor/foreign portfolio investor controlled by the single sponsor.
“If someone is writing a big cheque, he wants to know that he is in control of the money,” said the Arcil chief.
The restriction (no sponsor can hold more than 50 per cent of an ARC’s equity base) is a big hurdle and this cannot be justified in the current environment, he added. ARCs are also keen to explore alternate ways of funding. “We believe the alternate investment fund route is a way that could be made more manageable to allow ARCs to raise capital…,” Bahuguna said.
“How do we take the capital base of ₹3,000 crore ($600 million) to a level of $5 billion? It will have its own challenges but if we have this as a target then we will be able to find solutions to banks (NPA problems),” he says, adding that for NBFCs foreign capital of 100 per cent is allowed but not in ARCs.
In addition, the RBI’s recent mandate that ARCs pay 15 per cent cash upfront (against 5 per cent earlier) while buying the bad loans has also pinched the ARCs’ pockets.
On management fees charged by ARCs at 1.5 per cent, Bahuguna added, “We should be getting two times more…We are not overcharging, we are undercharging.”
Business growthArcil is seeing a lot of opportunities in retail assets. “Experience has shown that there is a higher rate of churn in those portfolios, so capital can be churned faster. Therefore, it suits us to look at that particular asset base …perhaps merge the SME opportunity as well….But in the large corporates, we are going to be very selective,” he said.
Arcil has assets under management of ₹11,000 crore with retail comprising ₹800 crore. The rest are large corporate and SME loans. In FY15, it purchased assets totalling ₹2,000 crore and in Q1 it bought assets worth ₹320 crore.