Given their capital constraints, smaller ARCs are content taking bets on micro, small and medium enterprises (MSMEs). The time taken for recovery is also lesser compared to that in bigger ticket loans. For Reliance ARC, while the focus is more towards retail (60% of AUM) and SME (15%), its MSME exposure includes an auto component manufacturer, a steel player, a railway contractor and a liquor distributor. “A Kolhapur-based auto ancillary’s export orders were cancelled after 2008. His factory was shut, so we did some restructuring and re-oriented his business towards the domestic market. Then, there was a railway contractor who was stuck in some projects, so we helped him complete the projects,” says Asokan Arumugam, CEO, Reliance ARC, which is majority-owned by Reliance Capital.
Arumugam cites another MSME example, ‘There was an iron rod manufacturer who decided to put up a plant in Hospet (Karnataka) for sourcing iron ore and manufacturing rods and that is when iron ore mining was banned. We have restructured his loans by giving him some discount and he has sold some non-core and personal assets and infused money into the business.” While Reliance ARC currently does not have any large sector exposure, Arumugam says that they did look at a large power asset last year but the transaction did not fructify. “We managed to structure the transaction, but the pricing didn’t work. We thought the pricing should have been lower, but the bank didn’t think so. Once we raise capital, we would be open to sectors like power where we can use our group’s expertise in the sector,” he says.
Surprisingly, Edelweiss ARC’s Antony is not so sanguine about the viability of distressed power projects. “We have not acquired much in the power sector. Power assets are coming to the market, but unfortunately the tariff is not picking up. Yes, fuel-linkage will come with Coal India’s production going up but the issue is the tariff level. What distribution companies are offering is much below the viability rate.” Citing an example of a power asset that Edelweiss ARC did due diligence on, Antony says: “The initial capital cost was Rs.5 crore per mw and reached Rs.10 crore p