Arcil records show increase in home loan defaulters

There has been an increase in the number of defaulters on housing loans as individuals are facing the brunt of the high interest rate regime. The indication about this is the fact that the total security receipts (SRs) of Rs 1,100 crore issued by Asset Reconstruction Company (India) Ltd (Arcil) to banks between April-September 2008 for acquiring bad loans 20% were from home loan defaults.

Asset Reconstruction Companies (ARCs) is expecting further rise in housing loan defaults in the coming quarters in case the interest rates do not climb down. Said Arcil, managing director & CEO, S Khasnobis: ‘‘the retail loans, mainly housing loan default, form about 20% of the total SRs of Rs 1,100 crore issued by Arcil between April-September 08. The portion of Arcil's acquisition comprising retail loans is likely to rise given the current environment.'' When an ARC attain bad debts from a bank, based on a valuation they either pay cash or issue SRs which are under the hold of a trust and are redeemed after realization of assets.

Arcil, is the leader in attaining distressed assets, have acquired these bad loans in question from around 20 banks. However details of individual banks is not available, it appears that ICICI Bank's portion of the total SRs issued by Arcil stood around 30%. As per ICICI Bank report, the total value of bad loans sold by the bank to Arcil April 2008 onwards stands at Rs 608 crore for a sale consideration in excess of 62% of the gross loan book. Though it is not clear whether portion of this comprises retail loan defaults.

According to an ICICI Bank spokesman ‘‘Sale of retail NPAs has been one of the many tools adopted by the bank to proactively manage delinquencies in the portfolio. It is a standard activity undertaken in the normal course of business by all international banks. Sometimes the sale is conducted every quarter. Also, this is only a very small portion in the overall delinquency management strategy of the bank.''

Moreover NPAs have an adverse impact on shareholders' value of banks and financial institutions by bringing down margins. ARCs attain bad assets at a discount depending on the credit realization potential of the asset.

An industry expert said that banks in the further will be increasingly using ARCs to skim off their distressed retail assets so that they are not required to smear their hands in dealing with bad retail loans.

An official from ARC said although bad retail assets offer a huge opportunity, but it requires the right machinery (read, people) to gain monetary realization from such assets. Since beginning (August 2003), Arcil has been able to acquire total distress debt including overdue interest of over Rs 40,000 crore at an average valuation of 25%. Since setup SRs issued amount to approximately Rs 10,000 crore. So far, Arcil has already been able to resolve 65% of the non performing loans acquired till now and have recovered and distributed about Rs 2,800 crore to all the SR investors.