Edelweiss ARC To Raise Capital As Banks Move To All-Cash Sales Of Bad Loans

Edelweiss Asset Reconstruction Company (ARC) will seek to raise fresh capital as new rules from the Reserve Bank of India push banks to sell bad loans through all-cash deals.

Until now, ARCs offered a minimum of 15 percent in cash to buy bad loans while the rest was paid in the form of security receipts to be redeemed later. The new rules, however, ask banks to set aside provisions if they continue to hold security receipts against bad loans.

This means that banks may prefer to strike all-cash deals, for which, ARCs will need to raise more capital.

“It's a capital-intensive business. We need to raise capital,” said Siby Antony, chief executive officer at Edelweiss ARC in an interview with BloombergQuint. Antony refused to say whether the company will look at bringing in a foreign partner.

“Now more than 49 percent equity is allowed, so we will look at all options. This could potentially include a foreign investor,” said Antony.

With more than Rs 30,000 crore in assets under management, Edelweiss now has the country's largest ARC. The loans in its portfolio include debt of large companies like Bharati Shipyard Ltd. and Essar Steel Ltd. among others.

While banks have been slow to sell loans in the past 12 months, Antony believes that the new rules will leave bankers with little choice but to sell. This will provide an opportunity for ARCs, as banks have more than Rs 6 lakh crore in bad loans on their books.

“If you really look at the new norms of the RBI, the message is very clear. Clean up the balance sheet and the responsibility of cleaning up the balance sheet is with the board and the top management,” said Antony.

He, however, added that banks will need to take steeper haircuts in the case of cash sales.

Analysts are not convinced that sales of bad loans will pick up quickly. They point to a continuing gap between the price demanded by banks and the price at which ARCs and stressed asset funds are willing to buy. There is also a disconnect between the kind of assets that banks want to offload and the stage at which they want to sell.

According a September 9 research report from Religare Institutional Research, ARCs want to buy loans of small to mid-sized companies which are in early stages of default. In contrast, banks are most eager to sell loans of large corporates where resolution has proved difficult for some time now.

Is The ARC Industry Getting Overcrowded?

Despite the sluggishness in actual sales of bad loans, a number of new entities are looking to set up asset reconstruction companies and stressed asset funds. This includes deep-pocketed foreign firms, some of whom are tying up with domestic lenders.

In August, Apollo Global Management announced a partnership with ICICI Bank. As part of the partnership, the two firms will look to set up an asset reconstruction company as well as a stressed asset fund. State Bank of India has also tied up with Brookfield Asset Management for a stressed debt fund. New York-based private equity firm JC Flowers & Company, in partnership with Ambit Capital, and U.S. private equity fund KKR, is also looking to start ARCs.

The increased interest from foreign firms is supported by easier investment rules. The government now allows 100 percent foreign direct investment in ARCs under the automatic route. There is also no longer a restriction on the amount of equity that the promoter of an ARC can hold.

The change in rules will strengthen the structure of the industry and bring in more capital, said Antony.