Private lender IndusInd Bank will foray into the asset reconstruction business by funding acquisition of bad assets by asset reconstruction companies (ARCs) and also participate in the reconstruction of these assets.

“We are testing waters in the asset reconstruction business by working with an ARC…So, we will provide the funding and participate in reconstruction of the asset,” its Managing Director and CEO Romesh Sobti told BusinessLine . The Hinduja Group-promoted mid-sized bank has already hired people required to drive the business. “We should begin our first (bad loans) acquisition in a couple of months,” Sobti said.

According to him, because of the availability of well secured assets and ARCs have less capital a bank can enter this space.

RBI norm

In August, in an attempt to strengthen the asset recovery process, the Reserve Bank of India asked ARCs to pay upfront a minimum of 15 per cent of security receipts (issued against the underlying bad loan) as against the earlier 5 per cent. This will require ARCs to invest more money upfront and make the price of the asset more competitive.

“We have chosen the deal-by-deal structure. So, we will collaborate by providing funding to the ARC to acquire (the bad loan) and then can work on the reconstruction of the asset,” he added.

“I get the security receipts and the income that will accrue from the sale of the asset is the IRR (internal rate of return) and the market has seen earning an IRR of about 25-30 per cent. So, let us see,” Sobti said optimistically.

In 2008, peer lender Kotak Mahindra Bank group had floated its ARC unit, Phoenix ARC, in collaboration with a few investors.

Ramnath Pradeep, former CMD of Corporation Bank, in an article in BusinessLine, said, “Banks are better equipped in terms of manpower, knowledge of the borrower and knowledge of the security (assets). On the other hand, ARCs deal with the borrowers for the first time.”

He added that restructuring of loans, on condition that the promoters infuse some capital, can be done without banks incurring much loss. Banks can recover the losses later once the company turns around and/or the economic conditions improve. That has been the time-tested practice in the country. But none of the public sector lenders are seen doing this nowadays.

Loan rejig

In the second quarter of FY15, IndusInd Bank restructured about five bad loan accounts and sold around ₹16 crore of assets to ARCs. According to Sobti, the first quarter saw more sale to ARCs. However, with a drop in referrals to ARCs in Q2, the industry may see a drop in NPAs.