The Hindu Business Line : `ARC should create market, not buy bad loans'

NON-PERFORMING assets (NPAs) may be a bad word for most. But not for Mr Jack Rodman. The man trots the globe sniffing out NPAs (or NPLs (non-performing loans), as he prefers to call it) of banks and institutions because he eyes a business prospect in each such bundle of bad assets.

The 55-year old Managing Director, Asia-Pacific Financial Solutions, Ernst & Young, has sold $50 billion of NPAs in five countries (``the largest by any human being on this planet, certainly in Asia'' as he says).

Mr Rodman feels that he could bring in his vast experience and that of E&Y to liquidate a part of the Rs 60,000 crore-odd NPAs of the banking sector.

Mr Rodman spoke exclusively to Business Line during a recent visit to New Delhi to firm up E&Y's plans for India.

You have met Indian Government officials and representatives of banks and FIs to discuss asset reconstruction. What has been your impression?

As a background, it is important to recognise that I started the NPL business in Asia back in 1995 in Japan, which had NPL (non-preforming loans) problems way before the financial crisis set in. I then went to Korea and helped do the first transactions for Korean Asset Management Corporation (KAMCO) and then to Taiwan, where I transacted on behalf of the Financial Restructuring Authority (FRA). We have just completed the first loan sale in China for Huarong Asset Management Corporation.

So, when I respond on how our meetings went (in India), it is in the context of how my earlier meetings in these countries went. I would say that I have been impressed with the people I met in the Government. They have a good understanding of the issues and complexities. I believe that they have addressed all the important points in the proposed asset reconstruction company (ARC) legislation, including foreclosure and bankruptcy provisions and securitisation.

But, we have to recognise that other countries have developed ahead of you. So, you have the advantage of drawing upon your neighbour's experience.

You recently concluded a large NPA sell-off deal in China. As you aim to offer the same services in India, what are the differences and similarities you see in these markets?

There are a lot of similarities, which as I see it is a positive. From my perspective of the Huarong transaction, I do not want to compare India to China. That country has a much bigger NPL problem, with45 per cent of the country's financial assets of $1.1 trillion, or nearly $440 billion, non-performing or sub-performing. Huarong itself had $60 billion of NPL. We only packaged and sold $2 billion. That is a small per cent of the country's total NPLs.

Indian banks have reported an NPL of $13 billion. From my perspective, I don't care if it is understated — whether it is $13 billion, $26 billion or $39 billion.

The issue is how you address the problem and who takes the first step. Every country looks around and says, "Is there anybody in the country who would want to buy large portfolios?" As I see it, China took a bold first step. They took action. We had one intrepid leader, President Yang at Huarong. He understood the importance of bringing in foreign capital and embraced the idea of open auction, including international and domestic participants. He embraced full transparency and wanted everything to be done to the highest international standards. He hired a financial advisor — Ernst and Young — and committed to accepting market-clearing prices; he accepted all fair and reasonable offers, while reserving the right to reject offers.

We embraced the ministry and the central bank, who were educated about the process. We took them on the road shows. So, when investors expressed concerns about the legal framework in China or whether the Government would approve a transaction at any price, I did not have to make representations on behalf of the Chinese Government — the Central Bank and the Ministry of Finance did it.

When you talk about similarities, I feel the market in India is poised where the Chinese market was a year ago. In China, we were waiting for special regulations. I said, "I don't need them, I can transact under current law." I am still waiting for the special regulations. India has not got the special powers issued yet. The other similarity is that of awareness about the NPL problem.

While they (China) are growing at 7 per cent, your economy is growing at 5-5.5 per cent— that is attractive to investors. Also, you have a British legal system — another attractive feature. You have a bad foreclosure law, which is being addressed. You have special tribunals for NPLs. The ARC will address bankruptcy and foreclosure laws. All these are right steps. China, on the road to embracing the World Trade Organisation, accepted reforms, and wanted to strengthen the financial system. India is also doing the same thing. I see the same positive characteristics in India. And, I see people who are bright and knowledgeable about the process. So, I am encouraged.

How do ensure that the assets being sold are properly priced and that the process is transparent?

First of all, we bring in a team of people who do extensive due diligence to prepare as much information as possible about the loan — the more due diligence done, the less the risk. By reducing risk, the investor bids higher prices.

I don't price NPL. Though I have I sold more NPLs than anybody on this planet, certainly in Asia — $50 billion in five countries _ I cannot gauge the value of an NPA until I get really close to the bid date. Because, unless I get a sense from the investors on how they perceive the portfolio, it is difficult to know its value.

How do I know that we are getting the maximum recovery and the maximum price? That's a really simple process. You need to do the following things — One, put together a world-class seller due diligence. Two, you make the process completely transparent and fair. Three, when I run a loan sale transaction, the bank does not meet any investor without my being present. No one contacts borrowers. You don't want to have a bunch of borrowers running around making deals. These are the ground rules.

Then, you go out and present the opportunity to the most qualified investors, both international and domestic. The price paid is the highest price that the market is willing to pay.

So, one of the most important things is to maintain the sealed-bid competitive auction. That process assures that you get the highest price.

You have dealt with a number of bodies such as the proposed Indian ARC. What do you think should be the role of the ARC?

I feel that the ARC should be a vehicle to organise the resolution of the process. That is, the ARC should be focussed on the process. They should not be buying the loans. They should be creating the market, which should be the private sector. If you get into the business of buying loans, you get into the terrible complexity of how to value it.

When does Ernst and Young hope to undertake the first NPA deal in India?

We have been studying it. I would propose not to wait for the final ARC, because I think we can do it in the private sector. We could do something before the end of the year. But I need a seller, whether it is Government-led, private-led or consortium-led or through a bankers' association or maybe everybody puts in a few loans. We need to start the market. The question is who is going to go first.

Though I have met a lot of people here who would make good leaders, I have not met anybody yet who is willing to be the first to create the market. It is the Government's role to facilitate a process where market leaders can be protected.

President Yang could have failed, but I don't think they would have taken him out and killed him for that. I think they would have accepted that he had made every effort, but that the investors did not pay high enough a price or the process was flawed. I think he was a pioneer who took on a leadership role. He has been well rewarded now. He is famous. Every investor wants to meet him. And they want to meet us because we did something that was equally impossible. But we need somebody with integrity, who understands this process and is above reproach.

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