These investors – unlike their small, retail counterparts in mutual funds – are believed to have the stomach for such high-risk, high-reward bets.
With more and more banks insisting on being paid in cash for the sticky loans they sell, a direct entry of high net worth individual (HNI) investors would increase the fund flow in the market, feel the asset reconstruction companies (ARCs) – the stressed asset firms which are the prime buyers of non-performing assets from banks.
The ARCs have recently made a pitch to the Reserve Bank of India (RBI) to let wealthy investors subscribe to and trade in ‘security receipts’ (SRs) which are issued by ARCs to part-pay for loan portfolios bought from banks. These receipts are closest to ‘junk bonds’ in the emerging Indian financial market for stressed loans.
According to the regulations, an ARC must pay (a bank or financial institution selling loans) at least 15% of the deal consideration in cash. The balance can be in SRs issued for the specific deal.
Unlike a regular, secured debenture, the return and redemption of SRs, which typically have a life of 5 to 8 years, depend on the extent of recovery from the underlying assets. Under the circumstances, an increasing number of institutions, unwilling to carry the SRs in their books, want to be paid the full amount upfront in cash.
However, few ARCs have the capital or bank credit to cut large cash deals. This is the gap that many in the trade think can be filled in with HNI money.”For instance, an ARC can obtain investment commitments (for SRs) from HNIs and qualified buyers, and then call for the funds when a deal (to buy loans) is finalised with a bank,” a senior industry person told ET.
Thus, there can be a back-to-back arrangement, under which ARCs can use the funds received from HNIs and other investors (subscribing to SRs) to pay the bank(s) for the purchase of loans.
“This is a proposal that ARCs are revisiting. Some years back this was suggested to the regulators. But things didn’t move. The ARC industry is once again taking it up with the RBI. We understand Sebi is okay with it, but the participation of HNIs would need the RBI’s approval,” said a banker.
Banks and the stressed asset industry are divided on whether the central bank would pursue the proposal from the ARC industry. With the reported NPA number coming down and improved financials of banks, RBI is under no pressure, they feel. Also, the banking regulator may fear that many HNIs may not fully understand the risks in SRs. Another unstated reason could be a competitor indirectly gaining a foothold in the defaulting company by buying into SRs.
However, some in the trade believe this could be the best time to put in place a mechanism to let in savvy individual investors. “Slower corporate loan growth, deleveraging by corporates, mergers among banks and technical write-offs have contributed to lowering the gross NPA number. But NPAs rise and fall in a cycle, and we are already seeing a rise in individual loans. Some of these borrowers would turn delinquent in a few years. SRs issued against a basket of individual loans can be placed with HNI investors,” said another person.
In its recent communication to the regulator, the ARC industry has also suggested that banks should be asked to explain if there is no resolution for two years on any NPA account with outstanding of ₹100 crore or more.