Arcil plans to float an independent company to take over bad retail assets

There has been rise in defaults in the personal loans segment and to clean up their balance sheets the banks have been selling their bad retail assets to Asset Reconstruction Company (India) Ltd (Arcil). In view of this Arcil has is planning to float an independent company to arm to take over bad retail assets.

According to sources “Arcil is close to floating a company over the next month. We are talking to FIIs and banks to bring them together to form a company”. But it’s not clear whether the private company would require getting a license from RBI. As per sources RBI had earlier turned down Arcil’s proposal to float a subsidiary for its proposed retail venture. Asset reconstruction companies act as debt collector and acquire non-performing assets (NPAs).

Amongst private sector banks Arcil is handling Rs 800 crore of bad retail assets from ICICI Bank. Several public sector banks have also approached Arcil to take over their bad retail assets. Up till now Arcil has acquired bad loans from 47 banks and financial institutions in the country.

As per Crisil report, gross NPAs in retail loans are set to rise to 4% over the next two years from 2.7% at end-March, 2007. Dues across all retail asset categories have gone up and are likely to rise further in 2008-09.

For corporate bad assets, there are slew of measures, including Corporate Debt Restructuring, BIFR and Debt Recovery Tribunals, are avenues for resolving bad debt, whereas in the case of retail loans every debt will have to be handled individually. “Greater attention will be given to resolution of loans. The tenure for loans may be extended to address credit stress,” an Arcil official said.

The average expected rate of return for retail loans is around 20%. The average size of a bad asset in the retail portfolio is much smaller therefore it is more difficult to resolve. “The rate of return could be about 8-10% for a retail loan, but if one takes an average for a package of loans it could even be 20%,” a source said. Whereas rate of return of bad corporate assets range between 20-25%.

According to experts except home loans, all other assets in the retail portfolio register a fall in price. In the case of housing loans, real estate prices have appreciated; hence the pricing for such assets will be different.

Banks are now reluctant to get rid of their bad industrial assets since these accounts are revolving well on the back of improved fundamentals in the economy. They are gambling on fundamental real estate assets backing these bad accounts.
Pricing is an issue for most banks.

According to analysts so far, Arcil was the only major asset reconstruction company, making pricing for bad assets uncompetitive. But with the opening of 4-5 ARCs the pricing for bad assets will improve.