India's top private lender ICICI Bank has inked an agreement to form an asset reconstruction firm with international private equity investor Apollo Global Management. This would expand their existing relationship where the two already are JV partners in a private equity firm AION Capital.
AION Capital that raised $825 million in a special situations fund two years ago will also be a stakeholder in the proposed JV, the firms said in a joint statement.
The asset reconstruction firm will look at buying non-performing assets (NPAs) or bad loans from banks. Bad loans have become a key area of concern for Indian banking sector over the last few years. While much (88%) of the bad loans are with state-run lenders, private sector too has its growing share of NPAs.
Total private sector NPAs rose just over 50% to Rs 65,000 crore as of March 31, 2016, as per official data.
Indeed, ICICI Bank itself has the largest share of bad loans in its books, among the private sector lenders. The bank's gross NPAs rose 3.7% to over Rs 27,000 crore as of June 30, 2016. ICICI Bank's net profit for the first quarter ended June 30, 2016, declined 25% to Rs 2,232 crore due to higher provisioning.
Meanwhile, the proposed JV between ICICI and Apollo comes as another player looking to tap on to the opportunity.
Early this year, New York-based private equity firm JC Flowers & Co said it is floating a joint venture with Ashok Wadhwa-led investment bank Ambit Holdings Pvt. Ltd to acquire stressed assets in India.
While JC Flowers and Ambit will hold 47.5% each in the proposed asset reconstruction company (ARC) named 'Ambit Flowers Asset Reconstruction', former Citibanker and serial entrepreneur Jerry Rao will own 5% in the JV.
The Kotak Mahindra Group also signed an agreement with Canada Pension Plan Investment Board (CPPIB) to invest up to $525 million (about Rs 3,500 crore) in stressed assets in the country’s banking and corporate sectors. CPPIB will have the ability to invest up to $450 million of the total amount.
Most recently, SBI joined hands with another private equity investor Brookfield to tap on the asset reconstruction business.
Among others, financial services firm SREI Alternative Investment Managers Ltd, part of Kolkata-based SREI Group, said it is looking to float a Rs 2,000 crore (about $291 million) fund to invest in debt instruments of stressed companies.
Besides, Ajay Piramal-led Piramal Enterprises Ltd is gearing up to launch a fund with a corpus of Rs 6,000 crore (about $887 million) for distressed assets. The fund will seek to invest in potential turnaround companies and provide rescue capital.
Private equity firms have been particularly attracted by the asset reconstruction business. Besides, JC Flowers, Brookfield and Apollo Global, KKR picked a stake in International Asset Reconstruction Company Pvt. Ltd (IARC) and ADV Partners, an Asian private equity firm floated by executives who previously worked at multi-strategy asset management firm Mount Kellett, invested in NASDAQ-listed Encore Capital Group Inc's Indian arm- Encore Asset Reconstruction Company.
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