Restructures: Arcil CEO Vinayak Bahuguna discusses company’s evolution and relevance of ARCs
Asset reconstruction companies (ARCs) are acknowledged worldwide as an important part of the financial system. In India, ARCs are relatively young, with less than two decades of operational history. The Asset Reconstruction Company of India (Arcil) was the first Indian company in the space. Vinayak Bahuguna, CEO and MD, discusses the company’s evolution now and forward in the context of economic developments in a chat with Pankaj Joshi.
How relevant is the ARC concept at the macro-economic level?
It is quite relevant in a number of ways. Firstly, an ARC releases some operational bandwidth for institutions. Secondly, it enables release of capital which has been stuck for a long time, and the same capital goes back into circulation. For a stressed company, an ARC is helpful during the turnaround process. The last aspect is marginal as of now but will gain more momentum going ahead. Lastly, an ARC’s presence in the debt resolution and asset acquisition process, at some level, is a facilitator to entry of foreign capital into the economy.
How does Arcil see itself today?
We were the first ARC in the country and today are the largest in terms of capital employed, and aggregate security receipts (stressed asset acquisition from lenders). In terms of assets under management, we are third nationwide. Our nationwide footprint is 15 branches and equity ownership includes premier institutions like SBI, ICICI, IDBI and PNB. Corporate governance is top priority for us. By default, being the oldest, we have set the trend in certain areas.
Arcil is one of the very few full-service organisations. We cater to all segments of loans— corporate, SME and retail loans. All this makes us a one-stop solution for loan resolution for different types of lenders. The non-corporate segment is 20 per cent of our current asset book. In our total team of around 300 people, around 225 would be involved in the retail and SME segment operations, and 30-40 in the corporate segment, with the remainder being the support function.
What are the changes seen in the loan business?
The National Company Law Tribunal (NCLT) is a very significant development with long-reaching implications. For starters, banks will see a gradual scale-down in their loan workout teams. It will be recognised as a non-core activity and will be sourced out to people like us. We aim to be that reliable partner who would participate in the loan resolution process, through perhaps a joint ventures (JV) or other working arrangements. Banks will focus on their core activity of deposit aggregation, loan disbursements and generation of fee-based income.
NCLT is the best way to resolve legacy cases, though it is perhaps too stringent for new businesses. There lenders (banks or others) would need to be pragmatic, understanding and flexible. They must understand that new companies in their first business cycle are more vulnerable to swings. Hence, they do not necessarily qualify as distress businesses. They may need to think beyond the lender mentality. Perhaps, the lenders will have to participate in equity, handle it, value it and dispose it of in timely manner. Arcil itself aims to be a partner in turnaround cases and we would also take equity on our books.
In operational terms, legal part was dominant, especially in the Debt Recovery Tribunal (DRT) era. But now that will become somewhat limited. Banks will still call the shots, but the responsibility of keeping the business alive is also very much there, and they will be accountable to the other stakeholders. Again for that, fresh capital may have to be issued and banks will have to be comfortable with that. Overall, we see that restructuring and turnaround cases would take more priority in future, though resolution and liquidation cases will still be there.
Going forward, the banks would be more accountable for the capital they use, especially with the fresh capital infusion from the government’s side that is being contemplated. The government has already made it clear that better efficiency is expected.
How do you see your growth path?
For growth, Arcil recognises the need to evolve. We have to be more active in the NCLT process, which is one of the ways in which the industry framework is changing. Capital is always going to be scarce in our business.
India in general needs overseas capital flowing in, and therefore what is needed is creative solutions, better skills for both resolution and turnaround management.
Our focus will be on asset management, where we plan to quadruple our book in the next three years. Arcil has on-ground asset management capabilities which global investors seek and therefore we can get them as co-investors wherein we manage the process of resolution, acquisition and turnaround or disposal. Collaboration is a key part of our growth plan— with investment bankers and turnaround professionals.
Internally also, we are reskilling and adding new capabilities. Within our agreement, there are restrictions on activities like stressed asset financing on our own, so even there we have to do some innovations and grow through collaborations. This is especially so in areas like stressed properties. There we see a clear value role for us. For buyers, we help clarify and quantify risks and the collateral baggage that comes with the stressed assets which is a key area of apprehension. Also, we are now creating a product which allows them to buy the asset without the full outlay upfront, which again is a great convenience for them.
In terms of activity, we also would get involved more in restructuring and turnaround cases. This is the segment of non-performing loans (NPL) which is going to see major growth and it will reflect in our work profile as well. Being scavengers is not our vision. We have been building different skills, though our book growth in the past two years has been slow. Our cash position overall is good, we have built a reputation as a solution provider and have put in place an ecosystem so now there is a base for us to scale up. Our target, as mentioned is 4 times growth of asset book in the next three years and within that we see the share of retail and SME rising to 30 per cent from the current 20 per cent levels.
|Particulars (Rs crore)||FY 15||FY 16||FY 17|
|Capital adequacy ratio||90%||107%||115%|