Over Rs 30,000 Crore In Capital Chasing Stressed Assets In India

More than Rs 30,000 crore in global and domestic capital is chasing stressed assets in India in the hope that banks, looking to clean-up their balancesheets, will sell loans to asset reconstruction companies and distressed asset funds.

On Monday, The Edelweiss Group announced that it had entered into an agreement with Canada-based pension fund Caisse de depot et placement du Quebec (CDPQ), wherein the latter would commit an investment of Rs 5,000 crore into stressed assets. CDPQ will also pick up a 20 percent stake in Edelweiss Asset Reconstruction Company.

Edelweiss is the most recent to forge a global alliance.

Kotak Mahindra Group has struck a deal with Canada Pension Plan Investment Board for an investment corpus of $525 million, Brookfield Asset Management has committed Rs 7,000 crore in partnership with State Bank of India, and Piramal Enterprises together with Bain Capital Credit plan to invest upto $1 billion.

In addition, ICICI Bank has tied up with Apollo Global Management and AION Fund, while JC Flowers & Co has tied up with Ambit Holdings. On Monday, Mint newspaper reported that KKR & Co. is also planning to set up its own reconstruction company.

Each of these funds sees an opportunity in investing in stressed assets as the Reserve Bank of India (RBI) has asked banks to clean-up their balancesheets by March 2017. Since September of last year, on account of the RBI’s asset quality review, bad loans in the Indian banking system have risen to over Rs 6 lakh crore.

“Restructuring bad loans will need specialised effort. This will need a lot more capital also being put to work. A lot of this is risk capital, so you (ARCs) need to bring in risk capital because the banks have only so much risk capital that they can provide,” said Rashesh Shah, chairman and chief executive officer at Edelweiss Group.

Higher Capital Requirement

“Our estimate is that over the next four years the banks will sell about Rs 30,000 to 40,000 crore worth of assets for cash, or cash and security receipts,” said Rashesh Shah.

This, for now, is wishful thinking.

Banks have been slow to sell assets because they are unwilling to take the kind of haircuts that reconstruction companies want them to take. According to a September 9 report by Religare Institutional Equities, there is still a nearly 25 percent gap between the price that banks want to sell at and the price at which reconstruction companies are willing to buy.

This may change because of new rules announced by the RBI.

As per the new norms, banks will be required to set aside provisions if they decide to hold security receipts against bad loans. As a result, banks are likely to prefer all-cash deals. All cash-deals, however, can only be struck if banks are willing to take the requisite haircuts. Until now, asset reconstruction companies paid 15 percent upfront and issued security receipts for the remaining amount to be redeemed later.

This move towards all-cash deals is also the reason that ARCs feel the need to raise more capital. According to the Religare report quoted above,Indian ARCs currently have a total capital base of only around Rs 4,000 crore.

The Likely Outcome

The increase in the capital available to Indian asset reconstruction companies, coupled with the recent regulatory changes, will likely change the way bad loans are sold and restructured, said Siddharth Goel, associate director - financials, at India Ratings & Research.

“The ARCs like Reliance, or Phoenix or ARCIL weren’t able to invest in the larger assets. The bigger problem, with respect to asset quality, is the large corporates,” said Goel. “With capital coming in, it will now be possible for certain asset reconstruction companies to acquire the debt of larger stressed corporates.”

The higher capital will also allow ARCs to aggregate debt, thereby giving them more control over the process of bad loan resolution.