Anil Ambani’s Reliance Capital, one of the country’s biggest finance companies, has been allowed to trade in bad loans. On Tuesday, the company received the RBI approval that will enable its asset reconstruction firm to buy stressed assets from the Indian financial system. The system is estimated to have Rs 1,65,000 crore worth of stressed assets with an annual accumulation of nearly Rs 20,000 crore.
Reliance Capital-promoted Reliance Asset Reconstruction Company (RARC) will put in Rs 100 crore as initial investment. A Reliance Capital spokesperson confirmed the development. Reliance Capital holds 49% stake while two international investors, George Soros and Blue Ridge, hold 9.5% stake each in RARC. Also, GIC holds 9% equity in the venture while Indian Bank and Corporation Bank have 11.5% stake each.
Rajendra Kakkar, former MD and CEO of Arcil, is heading RARC which had applied for an ARC licence from RBI nearly one-and-a-half years ago. Reliance Capital, which is the first non-banking finance company to get the ARC licence, may intensify the competition in the ARC space as it did in sectors like mutual fund and stock broking.
However, after a smart pick-up in initial years, the numbers of stress assets deals have fallen due to new rules. For instance, the regulator has now set a floor price for any such deal. This price is the net present value of the cash flow from the asset. As this can be significantly higher than the heavy discounts offered in earlier deals, ARCs find it less lucrative.
Moreover, the government’s decision to treat optionally convertible debentures (OCDs) and preference shares as external commercial borrowings (ECBs) has put off many vulture funds, which were using these instruments to buy bad loans from banks. “But buoyant property prices have helped the market and pushed up the recovery of bad assets. In some of the recent cases, the recovery is more than 50% of the price at which the firms bought the stressed assets,” said a banker. Nearly Rs 10,000 crore worth of assets are likely to be available for grabs this year.
Out of the huge NPAs, roughly Rs 80,000 crore was refereed for resolution through the Corporate Debt Restructuring (CDR) scheme. The banks have restructured Rs 27,000 crore standard assets (that do not figure as NPAs) and Rs 65,000 crore debt through the CDR route. The assets that have been restructured continue to require significant amount of lender supervision. There is always a likelihood that some of these assets may turn into NPAs again.
The market leader in the asset reconstruction space is Arcil, which was floated by the State Bank of India, IDBI, ICICI Bank and the Punjab National Bank. It is the oldest one, set up in 2003. It has bought more than Rs 32,000 worth of assets for nearly Rs 8,000 crore.
The other licence holders are ASREC (the specified undertaking of UTI), International Asset Reconstruction Company (Citi, Union Bank and Centurion Bank), Pegasus (a group of private investors including big bull Rakesh Jhunjhunwalla), Asset Care Enterprise (IFCI, Punjab National Bank, Life Insurance Corporation of India) and Dhir & Dhir Asset Reconstruction and Securities. Another half a dozen applications have been lying with the central bank seeking licences to float ARCs.