Tag: reserve bank

RBI asks banks to shift from scam-tainted LIBOR to other rate benchmarks, BFSI News, ET BFSI

Banking & Finance

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The Reserve Bank of India has asked banks and financial institutions to use any widely accepted alternative reference rate (AAR) instead of LIBOR (London Interbank Offered Rates) as the reference rate for entering into new financial contracts.

The Reserve Bank‘s directive follows a decision of the Financial Conduct Authority (FCA), UK which on March 5, 2021, had announced that all LIBOR settings would either cease to be provided by any administrator or would no longer be representative.

The UK directive to phase out LIBOR came after a rate fixing scandal involving major global banks.

The RBI directive

In order to deal with the emerging situation, the RBI has asked banks and financial institutions to “cease entering into new financial contracts that reference LIBOR as a benchmark and instead use any widely accepted alternative reference rate (ARR), as soon as practicable and in any case by December 31, 2021.” The financial institutions, it suggested, should incorporate robust fallback clauses in all financial contracts that reference LIBOR and the maturity of which is after the announced cessation date of the LIBOR settings.

The RBI has also advised the financial institutions to cease using the Mumbai Interbank Forward Outright Rate (MIFOR), a benchmark which references the LIBOR, latest by December 31, 2021.

Board approved plan

The Reserve Bank of India (RBI) had in August 2020 asked banks to frame a board approved plan, outlining an assessment of exposures linked to LIBOR and steps to be taken to address risks arising from the cessation of LIBOR, including preparation for the adoption of the ARR.

While certain US dollar LIBOR settings will continue to be published till June 30, 2023, the extension of the timeline for cessation is primarily aimed at ensuring roll-off of USD LIBOR-linked legacy contracts, and not to encourage continued reliance on LIBOR.

“It is, therefore, expected that contracts referencing LIBOR may generally be undertaken after December 31, 2021, only for the purpose of managing risks arising out of LIBOR contracts (e.g. hedging contracts, novation, market-making in support of client activity, etc.), contracted on or before December 31, 2021,” the RBI said.

It has also asked banks and financial institutions to incorporate robust fallback clauses, preferably well before the respective cessation dates, in all financial contracts that reference LIBOR and the maturity of which is after the announced cessation date of the respective LIBOR settings.

The central bank also said it will continue to monitor the evolving global and domestic situation with regard to the transition away from LIBOR and proactively take steps to mitigate associated risks in order to ensure a smooth transition.

LIBOR scandal

The LIBOR Scandal was a highly-publicised scheme in which bankers at several major financial institutions colluded with each other to manipulate the LIBOR. The scandal sowed distrust in the financial industry and led to a wave of fines, lawsuits, and regulatory actions. Although the scandal came to light in 2012, there is evidence suggesting that the collusion in question had been ongoing since as early as 2003.

Many leading financial institutions were implicated in the scandal, including Deutsche Bank (DB), Barclays (BCS), Citigroup (C), JPMorgan Chase (JPM), and the Royal Bank of Scotland (RBS). As a result of the rate fixing scandal, questions around LIBOR’s validity as a credible benchmark rate have arisen and it is now being phased out. According to the Federal Reserve and regulators in the U.K., LIBOR will be phased out by June 30, 2023, and will be replaced by the Secured Overnight Financing Rate (SOFR).



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RBI, BFSI News, ET BFSI

Banking & Finance

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About 15.9% of loans less than Rs 25 crore to the MSME sector for public sector banks has turned bad as of March 2021, according to the Reserve Bank of India.

This was against an NPA ratio of 13.1% at the end of December 2020 and 18.2% at the end of March 2020. Loans due past zero days and 30 days also rose significantly to 60.7% and 10.6% respectively.

On the other hand private sector lenders recorded NPA ratio of 3.6% at the end of March 2021 against 2% at the end of December 2020 and 4.3% at the end of March. Loans due beyond zero days and 30 days also rose by 89.6% and 3.7% respectively.

As of February 2021, 80% of the MSME borrowers moved into high-risk category as per data released by the regulator.

MSMEs worst hit

The medium, Micro and Small Enterprises are among the worst hit and they face enormous stress in meeting their payment obligations, the Reserve Bank of India said in its latest edition of the Financial Stability Report.

“Despite the restructuring, however, stress in the MSME portfolio of PSBs remains high,” the regulator noted. “While PSBs have actively resorted to restructuring under all the schemes, participation by PVBs was significant only in the COVID-19 restructuring scheme offered in August 2020,” RBI said.

“Given the elevated level of debt of the stressed cohort, the implications of business disruptions following the resurgence of the pandemic could be significant,” the RBI said

The restructuring

Since 2019, weakness in the MSME portfolio of banks and NBFCs has drawn regulatory attention, with the Reserve Bank permitting restructuring of temporarily impaired MSME loans (of size up to Rs 25 crore) under three schemes.

As per data with the RBI, the banking industry together restructured loans worth Rs 36,000 crore under the August 2020 Covid loan restructuring scheme. Public sector banks held the lions share at Rs 24,816 crore while private banks recast MSME loans worth Rs 11,027 crore.

In contrast to this PSBs have been laggards in lending to this sector with aggregate MSME exposure growing at a paltry 0.89% in the last fiscal year ended March 2020. For private lenders this exposure grew 9.23% during the same time.

“Growth in credit to MSMEs during 2020-21 was aided by the ECLGS scheme, with aggregate sanctions at Rs 2.46 lakh crore at the end of February 2021,” RBI noted. “For Public sector banks credit to the sector remained flat and new disbursements turned negative, after adjusting for interest accretion on past loans; private banks on the other hand, showed relatively robust increase in exposure.”



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How corporates gorged on RBI’s easy money, shunned banks?, BFSI News, ET BFSI

Personal Finance

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Corporates took the advantage of liquidity offered by Reserve Bank‘s special liquidity windows to raise funds from the bond market, reducing their dependence on bank loans during the quarter

While the corporate bond market is still dominated by financial companies, non-financial companies have increased borrowing in the last one year.

The corporates tapped the long-term repo operations (LTRO) funds, and targeted LTRO offered by the RBi last year, raising funds for up to three years. Firms raised funds aggressively during the third and fourth quarters of the last year for deleveraging high-cost debt.

The fundraise

Corporates raised Rs 2.1 lakh crore in December ended quarter and Rs 3.1 lakh crore in the fourth quarter from the corporate bond markets. In contrast, the corresponding year-ago figures were Rs 1.5 lakh crore and Rs 1.9 lakh crore, respectively.

Bonds were mostly raised by top-rated companies at 150-200 basis points below bank loans. Most of the debt was raised by government companies as they have top-rated status.

For AAA-rated corporate bonds, the yield was 6.85 per cent in May 2020, which fell to 5.38 per cent in April 2021 and to 5.16 per cent in May 2021.

Debt reduction

The corporate world focused on deleveraging high-cost loans through fundraising via bond issuances despite interest rates at an all-time low. This has led to muted credit growth for banks.

According to data analysis by the SBI research wing, the top 15 sectors with more than 1,000 listed entities reported over Rs 1.7 lakh crore of debt reduction in 2000-21.

Refineries, steel, fertilizers, mining & mineral products, and textile alone reduced debt by more than Rs 1.5 lakh crore during FY21.

Fertilizers, mining and minerals, FMCG, cement products, consumer durables, and capital goods were among the sectors where loan reduction of 20 per cent or more was reported during FY21.

According to data from the Reserve Bank of India, loan growth fell to a 59-year low of 5.6% on year as of March 31. Credit was logging a 6.4% in the previous fiscal.

Low interest rates

As interest rates drop to an all-time low, corporates reduced their loan liabilities to facilitate a lower finance cost, which resulted in the primary issuance of bonds increasing by nine per cent.

The spread of AAA bonds for a 10-year tenor declined from 124 bps in April 2020 to 70 bps in April 2021.

Similarly, the spread for 5 year and 3-year bonds declined from 89 bps and 147 bps in April 2020 to 9 bps and 30 bps in April 2021 respectively.

This trend is continuing in FY22 also.

These companies not only reduced their loan liabilities at lower finance cost but also increased their cash and bank balance by around 35% in March, as compared to March 2020, suggesting a conservative approach to conserve cash during uncertain times.

Corporate willingness for new investments also remains tepid as the economy is still recovering from the second wave.



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RBI prescribes qualifications for MDs, WTDs of urban cooperative banks, BFSI News, ET BFSI

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The Reserve Bank on Friday prescribed educational qualifications and ‘fit and proper’ criteria for managing directors (MDs) and whole-time directors (WTDs) of primary urban cooperative banks and barred MPs and MLAs from these posts.

Issuing the guidelines for appointment of MDs and WTDs, the RBI said MPs, MLAs and representatives of municipal corporations will not be eligible to hold such positions in the primary urban cooperative banks (UCBs).

It further said the MD/WTD should be a post graduate or have qualifications in finance discipline. He or she could be either chartered/cost accountant, MBA (finance) or have a diploma in banking or cooperative business management.

The person should not be below 35 years of age or more than 70 years, it added.

“The person shall have a combined experience of at least eight years at the middle/senior management level in the banking sector (including the experience gained in the concerned UCB) or non-banking finance companies engaged in lending (loan companies) and asset financing,” the notification said.

Besides MPs, MLAs and representatives of municipal corporations and local bodies, persons engaged in business, trade or having substantial interest in any company too will not be eligible for appointment to such positions.

Regarding the tenure of appointment, it said the person can be appointed for a maximum of five years and will be eligible for re-appointment.

However, it said the MD or WTD will not hold the post for more than 15 years. After that, the person, if necessary, may be re-appointed after a three-year cooling period.

It further said the “UCBs whose existing MD/CEO has completed a tenure of five years may approach RBI either to seek re-appointment of the incumbent, if he/she is eligible, or for appointment of a new MD/CEO, within a period of two months…”.

In case a UCB decides to terminate the services of MD/ WTD before the expiry of tenure, it will have to seek prior approval of the Reserve Bank.

The directions are applicable to all Primary (Urban) Co-operative Banks, the RBI said.

In a separate circular, the RBI mandated the appointment of Chief Risk Officer (CRO) by UCBs with asset size of Rs 5,000 crore and above.

It is necessary that every UCB focuses its attention on putting in place appropriate risk management mechanism commensurate with its business profile and strategic objectives, it said.

“In this connection, it has been decided that all UCBs having asset size of Rs 5,000 crore or above, shall appoint a Chief Risk Officer (CRO). The Board must clearly define the CRO’s role and responsibilities and ensure that he/she functions independently,” the circular said.

The CRO should have direct reporting lines to MD/CEO or Board or the Risk Management Committee of the Board (RMC), it added.



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Centrum-Bharatpe joint venture to pump Rs 1,800 crore into PMC on merger, BFSI News, ET BFSI

Banking & Finance

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The joint venture floated by Centrum Group and digital payments startup Bharatpe for launching a small finance bank will infuse Rs 1,800 crore capital into troubled Punjab & Maharashtra Cooperative Bank (PMC) on its merger with the proposed bank, a top Centrum official has said. Last Friday, the Reserve Bank gave an in-principle approval to Centrum Financial Services, a step-down arm of the diversified financial services group, to set up a small finance bank (SFB) provided it took over the troubled PMC Bank.

The in-principle approval has been in specific pursuance to Centrum Financial Services’ offer on February 1, 2021 in response to the expression of interest notification dated November 3, 2020 published by the PMC Bank, the RBI said.

This paves the way for ending nearly two anxious years for the PMC depositors whose over Rs 10,723 crore are still stuck in the crippled cooperative bank that has been under RBI administrator since September 2019.

To launch SFB, the Centrum Group has sewed up an equal joint venture with Resilient Innovations, an arm of Gurugram-based Bharatpe. But Centrum Capital will be the promoter of SFB, under the prevailing laws, the group said.

“We (the SFB joint venture) have set aside Rs 1,800 crore for the SFB, which eventually will be pumped into PMC once the government scheme for merger is notified. Of the Rs 1,800 crore, Rs 900 crore will be invested in the first year by the joint venture split equally between the two and the remaining capital in stages,” Jaspal Bindra, executive chairman of Centrum Group, told over the weekend.

Whether they will take over the more than Rs 6,500 crore of NPAs of PMC and also the over Rs 10,700 crore of its deposits, Bindra said that will be known only after the government notified the merger scheme.

“What terms and conditions the government will set in the merger scheme will decide the fate of huge bad loans and losses. In fact, this is the only little unknown we have as of now,” Bindra quipped.

That the groups have allocated nine-times more capital over the RBI mandate of Rs 200 crore for the SFB shows the seriousness of the promoters. If it succeeds, this will be the first SFB in nearly six years — the first set of SFB licences were issued in August 2016, when the monetary authority also made such licensing on-tap.

Bindra, who was the group executive director and chief executive for Asia Pacific at Standard Chartered Bank till 2015, joined Centrum in April 2016 as executive chairman and picked up around 25 per cent, also said they will surrender all their NBFC licences before launching the SFB.

“The RBI has given us 120 days to complete the other “fit and proper conditions” to seek the final licence, which I am very confident of meeting well in time. In fact, we will be seeking the final licence as soon as possible,” he said.

Asked he chose a startup to form an equal joint venture for its banking foray, Bindra said, for one, very few players have the technological edge that Bharatpe has. “For another, we’ve been having strong business relationships with the Gurugram startup since the very first day of its operations.”

“So we are known to each other since 2018 and moreover our businesses complement each other and the SFB will definitely be a tech-driven bank for sure. In fact, we have had a full joint agreement in place much before we sought the licence and we joint bided for the licence,” he added.

Asked if the focus on technology will lead to branch rationalisation of PMC, he said when it comes to lending it will be tech driven “but for deposit raising we have to have branches. So in effect we may have to retain the branches to a large extent”.

The city-based Centrum Group, founded by Chandir Gidwani and Khushrooh Byramjee in 1977, has a diversified fee business and a lending platform for institutions and individuals. It offers investment banking, mid-corporates & SME lending, and broking for institutions and retail. It also provides MSME credit, wealth management, affordable housing and micro lending, apart from private debt and venture capital.

Centrum Capital, which is listed on the exchanges, reported a net loss of Rs 16.02 crore in Q3 of FY21 as against a net profit of Rs 3.35 crore in Q3 of FY20 as its income declined 7.2 per cent to Rs 123.12 crore in the quarter.

On the other hand, 2.5-year-old Bharatpe closed FY21 with an operating income of over Rs 700 crore, up from Rs 110 crore in FY20, driven by its credit business that closed the year with a loan book of Rs 1,600 crore, its president Suhail Sameer had told last week.

As of March 2020, PMC’s deposits stood at Rs 10,727.12 crore, advances at Rs 4,472.78 crore and gross NPAs at Rs 3,518.89 crore and net loss of Rs 6,835 crore, with a negative networth of Rs 5,850.61 crore.

The PMC book was so bad that as much as 73 per cent of its assets worth over Rs 6,500 crore of the total Rs 8,880 crore loans were to the crippled developer HDIL and all of them had turned dud by September 2019.

A good portion of the deposits are of senior citizens and cooperative societies including an RBI officers association. Its share capital is Rs 292.94 crore.

Bindra said they are yet to finalise the name for the SFB but added it will not be PMC for sure. The board is more or less in place and I will certainly be a part of it, he said.



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Karnataka Bank declares loan to Reliance Home Finance as fraud, BFSI News, ET BFSI

Banking & Finance

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Private sector Karnataka Bank has declared accounts of Reliance Home Finance and Reliance Commercial Finance a fraud with combined loan outstandings of over Rs 160 crore to the lender.

The bank has reported to the Reserve Bank regarding frauds in the credit facilities extended earlier to two listed companies — Reliance Home Finance with loan outstanding of Rs 21.94 crore and Reliance Commercial Finance Rs 138.41 crore as fraud, Karnataka Bank said in a regulatory filing.

The lender said it has been dealing with Reliance Home Finance since 2015 and with Reliance Commercial Finance since 2014.

With regard to loan to Reliance Home Finance, as many as 24 lenders were part of a multiple banking arrangement, while in case of Reliance Commercial Finance as many as 22 lenders were part of the loan arrangement.

Karnataka Bank said its share in the multiple banking arrangement to Reliance Home Finance is 0.39 per cent and to that of Reliance Commercial Finance is 1.98 per cent. The lender said it has made provision up to 100 per cent in both the cases against the loan given to the companies.

“Both the accounts were classified as NPA (non-performing assets) and have been fully provided for. As such, there is no impact on the financials of the bank going forward,” Karnataka Bank said.

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Seven ways RBI’s new uniform framework will affect microfinance sector, BFSI News, ET BFSI

Banking & Finance

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The proposed uniform regulatory framework for the microfinance sector by Reserve Bank would help the sector expand, become competitive yet safeguard the borrowers from the debt trap.

Under the new proposed rules, microfinance institutions (MFIs) can provide collateral-free loans to households at interest rates determined by their boards. They will get the freedom to set rates and end regulatory cap on interest rates

The RBI has proposed a debt-income ratio cap so that the loans should be given in such a way that the payment of interest and repayment of principal for all outstanding loans of a household at any point of time should not cross 50 per cent of the household income.

Here’s how the changes will impact the sector, companies and the borrowers

The proposed regulations provide more flexibility to non-banking finance companies-microfinance institutions (NBFC-MFIs) in the pricing of loans. The removal of the interest rate ceilings is expected to increase competition on loan pricing.

A uniform regulatory framework for the microfinance sector will ensure a level playing field among all regulated players.

Capping the borrowers’ indebtedness at 50% of household income may impact the overall credit growth in the microfinance industry. With a cap on the fixed obligation to income ratio at 50%, the maximum permissible indebtedness of rural microfinance borrowers could be lower than the current levels

The RBI’s recommendations can ensure responsible lending in the microfinance space. A misuse of flexible pricing guidelines for NBFC-MFIs may not be possible because the pricing of loans would be market-driven on the back of competitions.

Bandhan Bank and Ujjivan Small Finance Bank may be the hardest hit, given the high ticket size of their loans. Unlike in the past when no more than two MFIs could lend to the same borrower, this limit will now apply to all lenders.

With the onus of assessment of household income shifting to lenders, they will need a board-approved plan for the same. The stipulation for the assessment of household income may lead to an increase in borrowing costs for customers. Each NBFC-MFI would need to adopt an interest rate model taking into account relevant factors such as cost of funds, margin and risk premium and determine the rate of interest to be charged for loans and advances.

The lifting of the interest rate cap would benefit MFIs as their margins will not be under pressure, but put the onus of fair pricing on MFIs

Key proposals

The key proposals of ”Consultative Document on Regulation of Microfinance” include a common definition of microfinance loans for all regulated entities, capping the outflow on account of repayment of loan obligations of a household to a percentage of the household income, and a board-approved policy for household income assessment.

It also suggests no requirement of collateral and greater flexibility of repayment frequency for all microfinance loans.

As per the consultative paper by the RBI, a microfinance loan would mean collateral-free lending to households with an annual income of Rs 1.25 lakh in rural areas and Rs 2 lakh at urban and semi-urban centres.

The entities engaged in microfinance lending will be required to display board-approved minimum, maximum and average interest rates charged on loans. They will also be required to disclose pricing related information in a standard simplified fact-sheet.

There will be no prepayment penalty, said the consultative paper on which the RBI has invited comments from the stakeholders by July 31.



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ARCs bank on retail loans in pandemic shift and bad bank competition, BFSI News, ET BFSI

Banking & Finance

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As the bad bank is set to take away the big chunk of their business, asset reconstruction companies (ARCs) are thinking smaller to grow big.

ARCs have been banking on retail loans to drive business in the pandemic-hit FY21 and see the share of retail loans reaching 50% of the pie.

The ARCs are also hit by the RBI-mandated loan restructuring and moratoriums, which had led to a drop in bad loans among corporates,

The Rs 1.5-lakh-crore asset reconstruction market comprises over a dozen players. The upcoming national bad bank will add to the competition in the market and lead to distortion due to government guarantees.

The pandemic-hit FY21 saw tepid overall growth for ARCs, but retail loan portfolio grew faster adding at least 25 per cent more to the assets under management (AUM).

Retail growth

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 run by Kotak Mahindra Bank, JM Financial and Reliance ARC among others since the past few years.

While Reliance ARC snaps up only retail loans, Phoenix ARC has 20 per cent of its Rs 8,500-crore total book/AUM as retail loans.

Edelweiss ARC, which has AUM of Rs 40,8000 crore, and has made a recovery of Rs 5,400 crore in FY21 from 179 accounts. The company expects about around 50 per cent of overall ARC assets coming in from retail loans in the next two years from the 10% now. On industry level, the share of retail in ARCs is around 20%.

Why retail loans?

In the past two years retail loans are rising, while corporate NPAs are coming down due to the moratorium and restructuring allowed by the Reserve Bank, which has led to a rise in interest in retail loans.

Retail loans give higher margins and better recovery rates despite the high costs.

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 adds.

However, the retail book may not grow too big for too long as once the pandemic situation normalises and large corporate books may come up for sale.

The national bad bank will leave the field uneven for private players like us due to the proposal of government guarantee.



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Pvt ARCs moving to retail loans as national bad bank nearing reality, BFSI News, ET BFSI

Banking & Finance

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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 per cent 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 per cent 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 run by Kotak Mahindra Bank, JM Financial and Reliance ARC among others since the past few years.

While Reliance ARC snaps up only retail loans, for Phoenix ARC comprises 20 per cent 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 per cent of overall ARC assets coming in from retail loans.

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

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,” Sanjay Tibrewala, the chief executive of Phoenix ARC, which is among the top five players, told on Sunday.

Tibrewala said their retail portfolio accounts for 20 per cent 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 per cent.

On why the industry is snapping up more retail assets despite it being a high cost business, Tibrewala said it’s 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 adds.

However, Tibrewala does not see the retail book growing too big for too long as once the pandemic situation normalises, he sees large corporate 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.



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Pvt ARCs moving to retail loans as national bad bank nearing reality, BFSI News, ET BFSI

Banking & Finance

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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 per cent 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 per cent 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 run by Kotak Mahindra Bank, JM Financial and Reliance ARC among others since the past few years.

While Reliance ARC snaps up only retail loans, for Phoenix ARC comprises 20 per cent 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 per cent of overall ARC assets coming in from retail loans.

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

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,” Sanjay Tibrewala, the chief executive of Phoenix ARC, which is among the top five players, told on Sunday.

Tibrewala said their retail portfolio accounts for 20 per cent 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 per cent.

On why the industry is snapping up more retail assets despite it being a high cost business, Tibrewala said it’s 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 adds.

However, Tibrewala does not see the retail book growing too big for too long as once the pandemic situation normalises, he sees large corporate 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.



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