While banks may start disposing bad loan that have ballooned to unmanageable proportions, reconstruction companies wonder if asset prices will be available at internationally competitive prices, writes Sunitha Natti
Vinayak Bahuguna calls himself a ‘meat cutter.’ The thick-rimmed black spectacles accentuate his spotless formal attire making him look every inch the high-profile CEO about to cut a corporate deal. But, Bahuguna asserts he works in a dumpster loaded with toxic NPAs. His job is to sift through the unwanted mess, buy the best among the bad loans, scrape whatever possible and conjure a tidy profit for investors.
“It’s like an out-patient and an emergency ward. We deal with the emergency part and don’t mind getting our hands dirty,” chuckles Bahuguna, chief executive officer & managing director of Arcil, the country’s oldest asset reconstruction company, which buys assets when banks give them and earn money by selling or reviving them.
Despite courting uncertainty that comes with non-performing loans, Bahuguna seldom gets stressed. Instead, the 54-year-old finds himself savouring success from deals that otherwise seem unwinnable. For instance, in 2005, he bought a deeply complicated asset with an industrial property, when the bank lost all hope. He roped in a developer, converted it into a residential property, and exited the project far quicker than anyone had ever imagined. “Those who work in a dumpster, work in the dumpster and come up with solutions,” he explains with professional insight that allows him to spot the best asset among the worst.
Taking a thoughtful sip of his coffee, he digresses, “Earlier, my average coffee intake was 3 or 4 cups a year. But now it’s much more!” The fuel perhaps for his intelligence.
Dealing with loan defaulters, wilful or otherwise, Bahuguna discovered invaluable things. “I found that if you treat people with respect, they react well. These borrowers were once treated with respect when they walked into those banks, and now their egos are badly bruised and no one looks at them with respect,” he observes, adding after a pause, “I realized that common sense works. Logic works instead of overt aggression or rudeness.”
Colleagues find him often inquisitive and somewhat dissatisfied in a quiet way. “You should proceed only if you satisfy yourself that a decision makes sense,” he says recalling an instance when his curiosity helped the bank he was working with pull out of a bad investment.
Now, with banks undertaking a ‘deep surgery,’ Bahuguna and his peers are staring at a $100 billion NPA reconstruction opportunity that’s bigger than all the Indian ARCs’ business combined. “If you compare the Indian economy size and NPAs 15 years ago and now, there’s been over 20 times escalation. Has the economy grown 20 times? It (NPA size) tells you the severity, significance and the scale,” he points out.
But some fear the trade value of NPAs could be lower than projected for a few reasons.
One, several loans are poorly collateralized, lack a viable business model, and not to mention the ever-greening of loans by banks to avoid prosecution. “Even if the size is small, it is a very big small. Even 10 cents of $100 billion is $10 billion — twice the size of the NPA pool from 15 years ago,” he says.
Besides size, what’s working in favour of ARCs is, changes in ownership rules, legal, regulatory environment, enforcement mechanisms, amendment to the Sarfaesi Act etc. Two, ARCs have higher confidence about eventual realization (of investment) unlike in the past, when there was always an overhang of claims from tax, excise or other departments.
But this isn’t any regular business that everyone can join. It typically works in cycles. You invest in one and divest in the next. In the meantime, you have to work out and wait for newer opportunities. Only those with business acumen and deep pockets survive. For instance, when the market first opened up following the 1998 Asian crisis, there were a handful of specialized investors, a dozen-odd in Asia, but those just sniffing around, soon lost interest and folded up since. “There are 26 players now and several, including foreign investors, are aspiring for a licence, but only serious players will survive,” Bahuguna predicts.
With new entrants coming, and existing players chasing higher ambitions, Arcil will have to deal with increased competition. It already lost its pole position as India’s largest ARC to Edelweiss, but Bahuguna and team, aren’t going after the market share.
“Numbers don’t drive me. I’m-taller-than-you or fairer-than-you beats the point of you trying to meet stakeholder expectations,” he says confirming that Arcil’s market share might dip, but growth, income and profitability will rise. Even if you are talking about a 20 per cent share (of $100 billion), that’s $20 billion. But considering the specialized business, Bahuguna, finds it an unrealistic target.
“I don’t want to take up so much that I can’t sleep at night,” quips the chartered accountant, sticking rigidly to the script.