Our Focus Is To Be Profitable And RoE-accretive, Says Ravindra Rao, Reliance Asset Reconstruction
Asset reconstruction is not just about resolving corporate stress. In retail and SME lending too, asset-reconstruction companies are making their presence felt, buying distressed assets and free capital for banks. BW Businessworld’s Clifford Alvares caught up with Ravindra Rao, Executive Director & CEO, Reliance Asset Reconstruction Co. to understand the nature of retail ARC, resolution of assets/portfolio, and the growth prospects.
Edited Excerpts:
Most ARCs focus on corporate distressed assets. Reliance ARC has been a retail-focused ARC. Why?
Resolution of retail NPAs is our strength. We have unparalleled domain understanding, capability and infrastructure to turn around the stressed retail assets acquired. Therefore, we consider ourselves market leaders. Corporate distressed assets give you higher AUM, but our objective has been to generate profits and deliver better returns to shareholders. The retail segment is most profitable and cash generating. Today, we are in the top-3 active ARCs in this space.
Retail resolution is akin to recovery management for banks, NBFCs and HFCs. The advantage of an ARC is a longer resolution timeline since there are no write-offs and pressures to make provisions at different stages of delinquency. We are patient. The essence is to generate maximum value from such purchases.
In retail we secure good underlying assets with potential to turn around a company at reasonable valuations. Of course, we do thorough due diligence to check underwriting standards, collateral, litigation, etc, before we determine valuations. Considering the SR structure, we see ourselves as partners of banks, where we take on the risk alongside the selling bank.
How has the new rule of 15:85 impacted the industry? Is that slowing down the retail ARC space?
Yes, the increase in ARC self-investment from 5% to 15% has changed the way ARCs operate. ARCs need more resources to fund their share.
Second, ARCs earlier could generate 25% internal rates of return (IRR) by charging management fees yearly on outstanding security receipts (SRs). Actual recovery was a bonus. But this changed since management fees were linked to NAVs of SRs. Therefore, resolution timelines and SR redemptions became key criteria for portfolio purchases.
Third, regulatory arbitrage over provisioning in banks and ARCs has been removed. ARCs are no longer an exit structure for balance-sheet management of banks, which still need to provide for bad loans even for off-book exposures. Therefore, banks have started looking for all-cash deals and a 50-50 SR structure. But this has also been a non-starter since views about the valuation of these assets diverged and there were few takers. ARCs apply a higher discounting factor for all-cash deals than for those under the SR structure.
Fourth, banks offered ARCs far too few assets for sale in the last two years and our ARC has grown 12% y/y (that too, propelled by corporate stressed loans).
This said, there is a huge market for distressed assets given the supply side today. ARCs can play a huge role in solving banks’ non-performing-asset (NPA) problem and there needs to be a belief in the ARC infrastructure, and valuations pertaining to the sale of the assets need to be more realistic.
When the retail loan book is smaller why is Reliance ARC not going in for an all-cash deal rather than go through the 15:85 rule?
It’s not whether the book is small or big. In a bank, the retail book is always smaller than the corporate/wholesale book. Similarly, our business model and AUM are not comparable with others in non-retail. We are a profitable entity and have made money in the past.
We are clear: we will participate in portfolio purchases only if they are profitable and RoE-accretive. Shareholder value is crucial. The 15:85 SR structure is good both for banks (or the selling institution) and us. Banks get a higher value for assets (than for all-cash deals), and steady redemption of SRs due to our quick resolution makes it a sweet deal for them. In a cash deal, profit is rear-ended, and eats into our earnings. In an SR structure, capital is efficiently deployed, and risk participation limited to 15%.
Today, there are hardly any cash deals at attractive prices in the market.
When you are doing well it's heard that Reliance ARC is eyeing corporate assets. What’s the reason for this when your peers are trying to focus on retail assets? Isn't it risky to move into new uncharted territory?
While we are clearly one of the leaders in retail-asset reconstruction, we believe that if we are to be a full-fledged ARC across segments, we need to operate in the corporate stressed-asset space. I see vast opportunities in that space – especially the mid-size segment. We have begun to build capabilities and are already scouting for the right portfolios. Within the Reliance Group is immense domain knowledge with respect to power, infrastructure, EPC and hospitals. If we obtain a good asset at the right price in these sectors, we will use the group for operation & maintenance (O&M) while the asset resides within RARC. We have the tail-winds of synergies within the Group in our pursuit for wholesale assets. Therefore, no way is it uncharted territory but a logical, calibrated segmented approach.
What has been your resolution rate and how do you see this ahead?
Our resolution rate is significantly better than competition. In fact, this is the chief factor, an ongoing one, while driving our SR redemptions and generating cash-flows.
What is the type of return you expect from resolutions? Is 10 per cent acceptable by investors, more so when the rupee is depreciating?
Returns are a function of the type of portfolio acquired and resolution timeline committed to on acquisition, and the chosen mode of investment. It depends on the entity, on resolution capabilities within the regulations. Therefore, assigning any specific percentage would be difficult. However, the normal expected post-tax return is 14-18%. My personal view is that with the rupee depreciating, the exit threshold might be extended, thus containing value appreciation.
Portfolio-purchase principles centre on gaining operational control of an asset/portfolio via the buy route. That would help in debt aggregation or maximising the value of each loan acquired through negotiations with creditors, promoters and by liquidating assets. Restructuring has not worked and entities that have resorted to this as an relentless resolution option have seen a drag on their profitability.
SEBI has allowed SRs to be listed but no one has taken that route yet.
What do you look forward to, say, over five years?
Over five years, we want to be a complete asset-reconstruction company (with 65-70% in retail and SME) and one of the leading industry players, specifically focused on driving share-holder value and superior portfolio-management capabilities.
