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You Owe Us - Part 1

A few ARCs are aggressively bidding for non-performing assets of banks. Can they fix the bad debt problem or are they throwing good money after bad?

Picture this: the dying days of FY16. A 14-member team is working round the clock at a prominent asset reconstruction company (ARC). The goal is to acquire 90% debt of a pharma company that has fallen on hard times. While the control room is set up at the Mumbai head office, the ARC has positioned its troops in six different locations to co-ordinate with various banks. The ARC falls short and is only able to acquire 65%, with certain banks failing to meet the March 31 deadline. Cut to the present. About a year later, the situation is starkly different. Goaded by a policy push, banks offloaded Rs. 20,000 crore of bad loans in the last fortnight of March 2017, among which Rs.5,000 crore belonged to a single bank. Amidst this hectic activity, the ARC business is now attracting the biggest and the best globally. While Wilbur Ross was among the earliest entrants in 2006, JC Flowers has teamed up with Ambit and Lone Star with IL&FS. Even Brookfield has tied up with SBI and Apollo Global is an active player through AION, having partnered with ICICI Venture.

Dinkar Venkatasubramanian, Partner, Restructuring & Turnaround, EYThere has also been a change in the way ARCs have been going about their business over the past couple of years. Earlier, ARCs would even bid for a shut steel plant for its inherent real estate value, but now they are more likely to bid for operating businesses which can possibly be revived or restructured, says Dinkar Venkatasubramanian, partner, Restructuring and Turnaround, EY. A policy change has been the catalyst here too. In the beginning, it was entirely a game of asset collection. ARCs could buy distressed assets from banks paying 5% in cash and the rest in the form of redeemable security receipts. Their business model relied more on the 1.5 to 2% asset management fee than turning around the distressed asset. 

This correlation between securities receipts and management fee drove the aggressive asset collection during September 2013 to August 2014. “Before 201

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