It’s good time to buy, but where’s the money?

Bad assets are on the rise. But it won't be easy for ARCs to raise money to buy them, Arcil MD & CEO S Khasnobis tells Aniruddha Ghosh & Sangita Mehta

    AT a time when most economies are on the verge of slipping into recession, one sector that may see more opportunities is the asset reconstruction business (ARCs). Arcil MD & CEO S Khasnobis talks about the challenges and opportunities the bad loan market throws up in such times.

The general perception is that the global economic slowdown will result in a good time for ARCs. What is your take on this?
    For an ARC, a slowdown helps only if the company has cash with it. If it doesn't have cash, then it can look at things happening, but can't buy any loans. Cash is an issue with ARCs because the model of ARCs in India requires them to take risk on their balance sheets. Thus, we need to have capital and the ability to raise funds.
    Then again, whether in a slowdown or otherwise, the ability of the system to sell is an issue in itself. You can not expect sales to happen overnight during a slowdown. However, this slowdown is a global one. Thus, it won't be easy to raise money from other markets as well. So, the slowdown is fine. There are a lot of bad assets being generated globally.
    But at the end of the day, you need buyers also. ARCs will not be in a position to buy them and keep them on their own balance sheets for long periods. You need the resolution also to happen simultaneously. So, the slowdown will also affect ARCs to an extent.
    What this means is that ARCs will have to have holding capacity, which will come only with funding capability.
    That funding capability is a question mark in India. Not many ARCs in India have more than Rs 100 crore in capital. On that Rs 100 crore, an ARC will only be able to raise six times that amount. As it is, people providing money to ARCs will be looking for higher returns. What it means is that it is a good time only for those who are able to raise cash.
So, how do you tackle this situation?
    As far as Arcil is concerned, we have raised capital. In fact, we took steps at the right time to raise capital. Last October, we had decided to do it, but it took a little longer because the stock market began declining. With this, our capital base will increase from Rs 220 crore to about Rs 340 crore. The capital augmentation will give us cash to the extent of Rs 1,000 crore.
    This exercise will be closed once we get the approval from the FIPB to induct new equity partner GIC of Singapore. It was a rights-cum-private placement.
In which sectors are you seeing stress?
    Stress is not sector-specific. It is across the board at present. We are in a situation where inflation is high and interest rates are moving up. It's too early to say, but slowdown will immediately hurt the retail sector, which will then trickle down to other sectors as well. There has not been a significant change so far. We don't expect an avalanche, earthquake or tsunami.
You have been with Arcil for almost five years now. Are you happy with its performance so far?
    There are no tools to measure our efficiency in this market. But to be very candid, we started with a Rs 10-crore capital and have now reached a level of Rs 1,500 crore. We have acquired an asset base that is growing at 25%, over 60% of our cases have been resolved and the money has been paid back to the system. So, there is reason to be happy in absolute terms.
Is there one thing that you would like to change, which you feel could have made a significant difference in ARCs performance?
    One thing is that if we had certain regulatory powers to change the management or take over the operational performance of a company. That would have helped us squeeze the timeline of turning around a company, which is what we actually trade on. In this business, we need to buy in bad cycles and sell in good cycles, apart from the fact that you need efficiency, capability, etc. I'm not saying we would have used the power.
    But the very fact that we had the power would have forced people to finish their work in a particular time frame. That would have enabled us to finish some particular projects in the right time frame. Apart from that, other issues like the flexibility to raise funds remain. It's not that all markets are bad for raising money. You can look at the Middle-East, Singapore or European markets also.
Going forward, how do you see things, given that the industry has evolved considerably in the past few years?
    The industry has still not evolved completely. A number of licences have been given, anticipating that there could be further problems and there is a need for competition in the industry. The evolution of the market will result in two-three significant players of more-or-less the same size. But that is something I don't see happening in the next two years.
    aniruddha.ghosh@timesgroup.com