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One of the most afflicted victim of the ongoing economic downturn of India is the country’s financial sector, which is already hurt.While businesses struggle to survive and survive, bad debts are likely to increase, which will affect the financial health of Indian banks.However, losing one thing is the profit of another.

Asset Reconstruction Companies (ARCs) that buy bank loans that are in default and seek to recover money from defaulters – ought to be looked into to be contacted in India in the near future, since the current economic downturn leads the country to a rise in assets that are not performing ( Postcode).

Even international players see an opportunity.The Canadian firm Brookfield, which manages assets Brookfield is would go to set up an ARC in India.

“Naturally GAD Direct lender site are likely to seek to settle outstanding debts.So, some of these cases might be available to the CRAs.In the near future it will be a second opportunity for us to participate “said RK Bansal, Managing Director and CEO of Edelweiss ARC, one of the top segment leaders in India.

It doesn’t mean ARCs have no problems.The current economic downturn and the resulting massive opportunity, has affected their business.From getting capital to collecting funds to collecting money, the CRAs have been fighting on many areas.

Additionally to that, there is also the Indian Bankruptcy as well as Insolvency Code (IBC) that was enacted in 2017, helped in the process of recovering funds from defaults, which is why lenders often choose this method instead of contacting an CRA.As part of an interview on Quartz, Bansal spoke about the challenges to come and how the growing NPA issue can be dealt with.The following excerpts have been edited:

Could you describe how an ARC is used for India?

The need to raise capital to purchase more assets is among the most difficult tasks.

At first, ARCs had a fee-based business model.Banks were required to pay CRA fees to deal with bad debts.However, it was the Reserve Bank of India (RBI) introduced the concept of 5:95 which means that in the event that an ARC purchased an asset with a high risk and wanted to invest at least five percent of the price of purchase.Then, during the time that Raghuram Rajan served as the Governor of the RBI the percentage was raised to 15%, since the central bank believed that this would result in the ARCs being more involved playing the game.

The Covid-19 crisis has opened up new opportunities for CRAs to do business?

There are two perspectives of the current economic crisis.It is having a detrimental effect on collection of bad debts because many people aren’t able to pay.A few of our customers whom we are attempting to recover money are having operational problems because of the lockdown.Therefore, they request additional time to pay their contribution.Certain asset disposals, that were on the verge of being concluded but were delayed.The cases of the IBC are delayed because there is a problem with the National Company Law Courts (NCLT) aren’t fully operational.

However, some bank as well as non-bank financial corporations (NBFCs) might end up as non-performing assets once the moratorium is over and the economic slowdown continues.Of course, the lenders are going to search for resolutions to their bad debts.So, some of these cases might be available to the CRAs for sale and this is a great opportunity.

What’s your issues that the ARC firm operating in India?

The need to raise capital to purchase more assets is among the most difficult tasks.

What are the benefits of ARCs for your Indian financial system when NPAs are projected to rise?

The CRAs on their own won’t solve the NPA issue in India.You must consider restructuring stressed Assets or IBC.The main benefit for having an ARC is that they are able to consolidate debt.The past was when numerous resolution plans fell through because lenders were unable to reach an agreement with one another.If ARCs can consolidate the debt, they will be able to resolve the issue.

ARCs also have the potential of restructuring assets.Another option is that CRAs may grant additional funds that banks would not accept because the additional amount has to be acknowledged as NPA and thus attract a provisioning.

Do ARCs have benefited from the introduction by IBC? IBC?

IBC has assisted CRAs in getting cash back quicker.For instance we visited IBC together with Bank of Baroda for the retrieval of Binani Cement.We received all of the money back in a single year, which could take between five and seven years.The clawback laws model were inefficient prior to the advent in the IBC.It took between five and 10 years to recover funds from defaulters.

Now, however, promoters must comply with the law change.If lenders or ARCs choose to switch into NCLT within the IBC the promoter is no longer in control of the business on day one.This has totally changed the way that borrowers behave.

Does there exist an arcs’ work process that is different from how they operate in India as compared to other nations?

There are only a handful of countries with an economic model that is private for ARCs, such as India.In the world, there are vast reserves of stressed assets such as Brookfield.The reason for this is that worldwide companies borrow funds from the bond market instead of through banks.This makes it simpler for the stressed asset fund to purchase bonds, and later work with management or modify them.

Private equity is a model that is well-known throughout the world.They invest in stressed assets and improve it before they sell the unit or manage it.It will get to this point someday however at the moment there is no mature bond market.

In India it’s totally different.At present, it is impossible to buy the assets that are stressed directly through market of debt.You must go through the ARCs.When you purchase the asset the CRAs will work with borrowers to seek out a new investor and help the company improve its performance by restructuring it and providing the additional funds required for rehabilitation.Then the duration of time the funds is recovered , and later is given back to banks.

Is there a chance of a failing bank?Do we need to intervene by the federal government in recovery markets?

A failing bank is really an ARC.It’s a great idea.The Indian government is yet to implement this concept.A number of countries, including Korea as well as Thailand already have adopted the approach as well. Their governments also have invested funds in a bank that is not reputable.If a bank that is bad is to be established in India it will need to invest huge amounts.For example, a poor bank in India will have to put 15 percent of the cost in an asset that is stressed, as we’ve seen previously.

There is also an actual conflict of interests.State-owned banks are able to deal in assets and sell them to a bank owned by the state that is insolvent.This implies that price discovery isn’t clear.

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