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August 03, 2009

The curious case of struggling asset reconstruction cos.

The Mint's banking editor has an article on the curious and counter intuitive case of struggling asset reconstruction companies.
...banks have stopped selling their bad assets. There has not been a single auction of bad loans this fiscal so far. While the mismatch between what the sellers of such assets expect and ARCs are willing to pay is one reason behind this, the other and more critical factor is that banks are not generating enough bad loans. This is because the banking regulator has allowed banks to restructure loans to help individual and corporate borrowers tide over the impact of the slowdown that gripped the economy after the mid-September collapse of US investment bank Lehman Brothers Holdings Inc. and the ensuing global credit crunch.

...A loan recast on such a large scale is indeed a new phenomenon, but Indian banks have been restructuring corporate loans for quite some time now through a mechanism called corporate debt restructuring (CDR). This was started in 2001 when some large firms, particularly in the steel sector, got into trouble following a sharp drop in demand and prices. Till last year, 219 cases were referred to this cell, involving Rs94,735 crore of debt, and 174 firms had actually got Rs84,714 crore of debt restructured at the forum. In the recent past, many more cases have been referred to the cell, including the troubled drug firm Wockhardt Ltd and now defunct discount retailer Subhiksha Trading Services Ltd.

...ARCs are also planning to buy retail loans. But that’s not a solution because ARCs’ capability in recovering consumer loans on a large scale is suspect. Some of them will have to close shop while others may have to diversify into other businesses that a non-banking finance company can do. Of course, if the economic recovery gets delayed and the bulk of restructured loans turn bad, they will survive as banks will be forced to sell stressed assets to clean up their balance sheets. Also, if they are desperate, banks will stop haggling for a few rupees more while selling bad assets.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in