Government prods SBI to bring in strategic investors for Arcil

Mumbai: The government has directed State Bank of India (SBI) to find strategic investors for Asset Reconstruction Company (India) Ltd, or Arcil, noting its importance in the resolution of stressed assets, said two senior officials with the country’s largest lender. They spoke on the condition of anonymity because the discussions are private.

SBI is the largest shareholder in Arcil with a 19.95% stake, while IDBI Bank, ICICI Bank Ltd and Punjab National Bank together own 42.45%. IDFC Bank, Karnataka Bank, Karur Vysya Bank and South Indian Bank, among others, also have stakes in Arcil.

“There are several options on the table. SBI is looking for investors, domestic as well as foreign, who will get in funds in order to strengthen the capital base of Arcil,” said one of the two SBI officials cited earlier. Arcil had Rs11,000 crore of assets under management at the end of March and a capital base of Rs1,500 crore.

The second person said the strategic investor may also look at buying stakes of other banks in Arcil in case they want to exit as part of their non-core assets sales. The idea of roping in a strategic investor for Arcil is aimed at strengthening its capital base, which will help the company to bid aggressively while buying bad loans, this person added.

Separately, Vinayak Bahuguna, chief executive officer and managing director of Arcil said the asset reconstruction firm is keen on raising capital and is in talks with several potential investors.

He added that such talks are driven by the management of Arcil and he is not aware if there are any parallel discussions initiated by any of its shareholders. Bahuguna didn’t reveal what valuation Arcil was seeking.

A spokesperson for the finance ministry did not answer phone calls seeking comment.

The effort to reinforce the capital of asset reconstruction companies (ARCs) comes in the backdrop of rising stressed loans. Indian banks are sitting on a stressed asset pile of around Rs10 trillion and last month the government moved an ordinance empowering the Reserve Bank of India to directly deal with bad loans.

Global investors are keen to acquire stressed assets or debt of troubled firms in India. Piramal Enterprises Ltd, Bain Capital Credit, Apollo Global Management and Brookfield Asset Management Inc. are among those looking to collectively invest at least $2 billion to buy stressed assets in the country.

According to Abizer Diwanji, partner and financial services leader at consulting firm EY, unlike most other ARCs, Arcil does not have the backing of a distressed asset fund. In case it manages to get such backing, it can participate more actively in buying stressed assets.

The development comes after Niti Aayog vice-chairman Arvind Panagariya said that rather than create a so-called bad bank to take over stressed loans of banks, ARCs can play an important role.

“There are in existence four or five reasonably-sized asset reconstruction companies plus there is a State Bank-run ARC, which we can further strengthen. The latter can play a useful role in providing market discipline,” Panagariya said in an interview to Bloomberg in May.

The proposal is also in line with RBI deputy governor Viral Acharya’s idea of resolving stressed assets through the ARC route, among others.

In his first public speech on 21 February, Acharya said that in cases where there is economic value in the short run, banks could consider a private asset management company (PAMC) structure, with a moderate level of debt forgiveness.

As of the end of March, India had 23 asset reconstruction companies certified by RBI.

Arcil was one of the most aggressive buyers of stressed loans from lenders. However, it has been slow and selective in picking up assets in the past two years because of valuation issues, said Bahuguna.

Currently, Arcil has Rs11,000 crore of assets under management, of which retail and SME assets (small and medium enterprises) are Rs1,800 crore.

According to a report released in April and prepared jointly by Assocham, Society of Insolvency Practitioners of India, and Edelweiss Asset Reconstruction Co. Ltd, approximately Rs2.44 trillion of gross bad loans were sold to ARCs so far.