Business Standard

ARCs to step up bad loan purchases in Q4

Improved resolution climate and commercial compulsion­s force banks to clean up their books


Asset reconstruc­tion companies (ARCs) are expected to step up purchases of bad loans in the fourth quarter (Q4FY18) as the recovery environmen­t improves and commercial compulsion­s force banks to clean up their books.

According to ARCIL, a Mumbai-based ARC, banks may put ~400 billion of non-performing assets (NPAs) up for sale this quarter. In this financial year so far, major commercial banks either announced or completed sales of ~400 billion of NPAs to ARCs.

ARCs had bought ~370 billion of NPAs from banks in 2016-17 and 40 per cent of this activity took place in January-March 2017, analysts and bankers said.

Vinayak Bahuguna, managing director and chief executive, ARCIL, said the activity would intensify in Q4. Banks are putting more NPAs on the block and ARCs are also participat­ing in insolvency cases at the National Company Law Tribunal, where over 400 cases are being heard.

Krishnan Sitaraman, senior director at credit rating agency CRISIL Ratings, said activity was expected to pick up in the current quarter due to an improvemen­t in the recovery environmen­t. ARCs acquired ~90 billion of NPAs in the six months leading to September 2017. According to the Reserve Bank of India data, the book value of assets acquired rose from ~1,598 billion in June 2014 to ~2,627 billion in June 2017. Similarly, security receipts issued by securitisa­tion companies and ARCs increased from ~520 billion in 2014 to ~940 billion in 2017.

Hari Hara Mishra, director at UV Asset Reconstruc­tion Company, said there was greater willingnes­s among banks to take appropriat­e haircuts and heightened interest for investment by distressed debt players.

Public sector bank executives said the tempo for sales of NPAs was building up. Some banks have issues with their capital requiremen­ts and selling an NPA account to an ARC, even at a discount, helps them maintain or improve their capital. Banks have made appropriat­e provisions for these NPAs over time and are willing to sell them at a discount.

Again, some ARCs have a significan­t exposure in a stressed company and in certain cases it makes sense that one ARC consolidat­es several banks’ credit exposure to the company. Edelweiss ARC is the fifthlarge­st lender to Essar Steel after having bought its NPAs from HDFC Bank, ICICI Bank, Axis Bank, and Bank of Baroda.

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