With RBI– Required loan restructuring and moratoriums easing the tide of non-performing loans among companies, ARCs have been banking on retail lending to boost business in the pandemic-stricken 21-year fiscal year, and players like Edelweiss ARC expect retail assets to come under industry-wide reach nearly half of the overall pie.
The Rs 1.5 lakh-crore asset rebuild market comprises more than a dozen players led by Edelweiss ARC, which controls more than 30 percent of the market, and the soon-to-be operational national bad bank, to be mainly financed by public sector and government-guaranteed banks, will increase market disorder and have private participants fearing that the government will guarantee the unevenness of their fields.
FY21, hit by the pandemic, had overall tepid growth for asset rebuilding companies (ARCs), but the retail loan portfolio grew faster, adding at least 25 percent more to assets under management (AUM).
According to industry participants, lenders like HDFC Bank, Industrial Bank, IDBI Bank, Federal Bank and non-banks, such as Bajaj Finance among others, they have aggressively sold their stressed retail books – auto, home and personal loans as well as credit card debt for ARCs like Edelweiss, Phoenix ARC managed by Kotak Mahindra Bank, JM Financial and Reliance ARC, among others, since the last few years.
While Reliance ARC only snaps up retail loans, for Phoenix ARC comprises 20 percent of its total book/AUM of Rs 8,500 crore.
Rashesh Shah, president and chief executive of Edelweiss Financial Services Group whose ARC arm is above an AUM of Rs 40,8000 crore, and made a recovery of Rs 5,400 crore in FY21 from 179 accounts, sees in the next two years around 50 per cent of ARC’s general assets coming from retail loans.
Edelweiss ARC’s retail portfolio is around 10 percent now, but it will be “de-leveraging the corporate portfolio and focusing on retail going forward, while at the industry level it’s around 20 percent. But I see it touching almost half the market in the next two years,” Shah told PTI over the weekend.
Going forward, the focus will be more on snapping up retail loans as this gives higher margins and better recovery rates, Shah added.
“Over the past two years, retail NPAs have been on the rise, while corporate NPAs are falling due to the moratorium and restructuring allowed by the Reserve Bank. This has caused interest among ARCs to increase in retail assets,” Sanjay Tibrewala, chief executive of Phoenix ARC, which is among the top five participants, told PTI on Sunday.
Tibrewala said its retail portfolio accounts for 20 percent of the AUM of Rs 8,500 crore, and that it grew marginally in the last year, while general retail assets for the industry jumped 25 percent.
On why the industry is snapping up more retail assets despite being a high-cost business, Tibrewala said it’s because of better margins and higher recovery levels.
Shah said his group’s ARC business so far has been very good, with strong margins, better recoveries/collections, which came in at Rs 5,400 crore in FY21 on 179 accounts.
“Going forward, we will focus more on recoveries and, when it comes to buying assets, the focus will be on retail portfolios. In recent years, retail has grown a lot, and I see that it is occupying half of the market”, said Shah, adding that they entered this space only three years ago.
He said that since then Edelweiss has added a team of 200 people to manage the retail portfolio as its staff becomes more intensive.
On the asset buying side, Shah noted that, on average, the acquisition cost ranges from 60 to 70 paise and sometimes they also go to profit sharing with the lender/seller.
Shah is driving retail as he is more predictable when it comes to turnarounds.
An industry expert also opined that ARCs that focus on the retail portfolio may be better positioned to cushion the impact of the national bad bank on their business, as the proposed national ARC will mainly be dealing with large loans of Rs 500 crore and above and that also mainly from public sector banks that have the largest piles of non-performing loans. Therefore, to protect their business, it makes more sense for ARCs to focus on retail lending, as this also offers better margins and faster resolution, he adds.
However, Tibrewala doesn’t see the retail book booming for a long time, as once the pandemic situation normalizes, he sees large coproratized books coming on sale.
“We’ve been in the retail business for many years, but we don’t see faster growth for retail once the pandemic-related restrictions and benefits normalize and corporate accounts return to the markets again,” said Tibrewala.
The bad national bank, he said, will leave the field “unequal to private players like us due to the government’s proposed guarantee. However, it could be an asset outsourcing area for us. We are actively looking at assets”.
Edelweiss ARC closed FY21 with revenue of Rs 340 crore, of which Rs 79 crore came in the fourth quarter and net profit of Rs 186 crore for the year and Rs 45 crore for the fourth quarter. It had a comfortable liquidity position of Rs 540 crore at the end of March.