KOCHI: Early last year, Aluva-headquartered Federal Bank was trying to recover Rs 25-crore loan it gave to a resort in Thekkady following a default. It was categorised as a bad loan or non-performing asset (NPA) in the banking parlance.
“With the help of a High Court order, we took over the resort. We had another company which was willing to buy the property, giving us the comfort to go ahead with the takeover plan,” said R Harikrishna Pisharady, who heads Federal Bank’s loan recovery wing. Fearing the resort will change hands soon, two brothers of the promoter came forward and cleared the loans. “We transferred the ownership to them,” said Pisharady.
In yet another case, a student-loan NPA case was pursued successfully after the bank found from the defaulter’s Facebook profile that he was financially sound with a secure job. The borrower had been evading repayment by telling the bank he was jobless and struggling to make ends meet.
When the concept of Asset Reconstruction Company (ARC), allowed by the government in 2016, was brought in, many thought it would help banks get rid of the ballooning NPAs.
However, ARCs are not finding the Kerala market lucrative enough even while banks such as Federal Bank realise it is better to chase the defaulters themselves rather than selling off the bad loans to the ARCs, where the margins are wafer thin.
In perhaps one of the earliest deals by an ARC in Kerala, Anil Ambani-backed Reliance ARC bought Rs 130-crore student loan from the erstwhile State Bank of Travancore in 2015 for Rs 63 crore while in another deal, Mumbai-based Edelweiss ARC bought a portion of the bad debt of Dewa Properties, which had a prime plot at Marine Drive in Kochi.
Edelweiss CMD Sibi Antony said the Dewa deal was just a “one-off” and ARCs are staying off the Kerala market due to the high registration costs here.
He said the transaction cost was in the region of 7-12 per cent of the total deal in Kerala compared to the fixed amount of just Rs 1-2 lakh per transaction in Mumbai.
Sibi said the ARCs buy the bad loans from a bank by way of an assignment. “The assignment needs to be registered and charges need to be modified,” he said, explaining the Union Finance Ministry had written to the states on the need to bring down the registration charges to zero. “But Kerala and some other states haven’t done that till now,” Sibi said.
Industry officers said South Indian Bank and Federal Bank have sold small parcels of bad loans to ARCs, but the market is not very active. Other ARCs who have bought bundles of bad loans from the banks include JM Financial ARC and Phoenix ARC of the Kotak Mahindra Group, in addition to Edelweiss ARC and Reliance ARC.
Pisharady said selling the bad loan portfolio to ARCs does not make sense for the banks if they can pursue the matter themselves.
“Besides taking a big cut, the ARCs will take seven to eight years to give the full amount. From our experience, we’ve found we can pursue bad loans more effectively through talks and negotiations. We’ve more people on the ground than the ARCs,” he said.
Mathew Antony, an expert on mediation and conflict resolutions, said Kerala is a legally aware state and the people know more about their constitutional and legitimate rights than anywhere in the country. Also, the margin of profit is very thin.
“To take a chunk of bad debts, the cost of capital will work out to about 15-17 per cent. So, it’ll need returns of 27-28 per cent to make the ARC business very profitable,” said Antony. “It’s very difficult to get that kind of returns,” he said.