Private ARCs moving to retail loans as national bad bank nearing reality

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Mumbai: With RBI-mandated loan restructuring and moratoriums ebbing the tide of bad loans among corporates, ARCs have been banking on retail loans to drive business in the pandemic-hit FY21 and player like Edelweiss ARC expects the industry-wide retail assets under management to hit nearly half of the overall pie.

The Rs 1.5-lakh-crore asset reconstruction market comprises over a dozen players led by Edelweiss ARC that controls over 30% of the market, and the soon-to-be operationalised national bad bank, to be funded mostly by public sector banks and guaranteed by the government, will add to the clutter of the market and has private players fearing the government guarantee unlevelling their fields.

The pandemic-hit FY21 has seen tepid overall growth for asset reconstruction companies (ARCs), but retail loan portfolio grew faster, adding at least 25% more to the assets under management (AUM).

According to industry players, lenders like HDFC Bank, IndusInd Bank, IDBI Bank, Federal Bank and non-banks like Bajaj Finance among others have been aggressively selling their stressed retail books — auto, home and personal loans as well credit cards dues to ARCs like Edelweiss, Phoenix ARC owned by Kotak Mahindra Bank, JN Financial and Reliance ARC among others since the past few years. While Reliance ARC snaps up only retail loans, for Phoenix ARC comprises 20% of its Rs 8,500-crore total book/AUM.

Rashesh Shah, chairman and chief executive of Edelweiss Financial Services Group whose ARC arm sits over an AUM of Rs 40,8000 crore, and has made a recovery of Rs 5,400 crore in FY21 from 179 accounts, sees over the next two years around 50% of overall ARC assets coming in from retail loans.

The retail portfolio of Edelweiss ARC is around 10% now, but it will be “deleveraging the corporate portfolio and focusing on retail going forward, while at the industry level it’s about 20%. But I see this touching almost half of the market over the next two years”, said Shah.

Going forward, focus will be more on snapping up retail loans as it gives higher margins and better recovery rates, Shah added.

“For the past two years retail NPAs have been rising, while corporate NPAs coming down due to the moratorium and restructuring allowed by the Reserve Bank. This has seen interest rising among ARCs for retail assets,” said Sanjay Tibrewala, the chief executive of Phoenix ARC, which is among the top five players.

Tibrewala said their retail portfolio accounts for 20% of the AUM of Rs 8,500 crore, and which grew marginally last year, while the overall retail assets for the industry jumped by 25%.

On why the industry is snapping up more retail assets despite it being a high cost business, Tibrewala said it is because of better margins and higher recovery levels.

Shah said that so far his group’s ARC business has been very good with strong margins, better recoveries/collections, which stood at Rs 5,400 crore in FY21 from across 179 accounts.

“Going forward, we will focus more on recoveries and when it comes to buying assets the focus will be retail portfolios. Over the past few years, retail has been growing very big, and I see it taking up half the market,” Shah said, adding they entered this space only three years ago.

He further said since then Edelweiss added 200-strong team to man the retail portfolio as its more people intensive. On the asset purchase side Shah noted that on average their acquisition cost varies from 60 to 70 paise and sometimes they also go for profit sharing with lender/seller.

Shah is driving retail as it’s more predictable when it comes to recoveries.

An industry expert also opined that ARCs which focus on retail portfolio may be better placed to cushion the impact of the national bad bank on their business, as the proposed national ARC will primarily be dealing with large chunky loans of Rs 500 crore and above and that too mostly from public sector banks which have the highest bad loans piles.

So to secure their business, it makes better sense for ARCs to focus on retail loans as it offers better margins and faster resolution too, he added.

However, Tibrewala does not see the retail book growing too big for too long as once the pandemic situation normalises, he sees large coprorate books  coming up for sale.

“We have been in retail segment for many years but do not see faster growth for retail once pandemic related restrictions and benefits normalise, and corporate accounts come back to the markets again,” Tibrewala said.

The national bad bank, he said, will leave the field “uneven for private players like us due to the proposal of government guarantee. However, it can be one area for sourcing assets for us. We are actively looking at assets”.

Edelweiss ARC closed FY21 with a revenue of Rs 340 crore of which Rs 79 crore came in Q4 and earned a Rs 186 crore net profit for the year and Rs 45 crore for Q4. It has comfortable liquidity position of Rs 540 crore as of end March.