ARC growth may moderate to 30% in 1 year, says Crisil

Written by fe Bureau | Updated: Aug 8 2014, 05:54am hrs
Growth of asset reconstruction companies (ARCs) is expected to moderate to 30% in the next one year because of the amendments to regulations announced by the Reserve Bank of India (RBI), rating agency Crisil said on Thursday.

Asset reconstruction companies (ARCs) have witnessed very high growth in recent times, and their assets under management (AUM) have increased four-fold to R42,000 crore in the year to June 30, 2014, the agency said in a statement.

Crisil said that in the near term, ARCs will find it challenging to align their pricing with the expectations of the asset-selling banks, given that the minimum investment requirement has been increased significantly.

In the long term, however, the new rules will bolster price-discovery, Crisil said.

According to Crisil, the average age of NPAs sold has fallen below 2 years against around 5 years in the past and will reduce further and expects that the average time taken to aggregate debt can also be reduced to around 12 months from nearly 24 months earlier.

Pawan Agrawal, senior director, Crisil Ratings said, The amendments to regulations will also improve the recovery prospects for ARCs. Membership of the joint lenders forum, lower threshold for consent to enforce the SARFAESI Act, more time available to conduct due diligence and greater disclosures will all enhance transparency and lead to better resolution of NPAs.

The report also pointed out that ARCs will also face challenges with respect to their capital requirements which will increase because the minimum investment requirement in security receipts (SRs) has been tripled to 15% .

The second challenge is to increase the value they bring to the resolution process. But recovery levels havent been up to the potential the cumulative redemption ratio of SRs for the 10 years till June 2013 stands at 53%. Crisil believes this track record will improve with the strengthened regulations and positive steps being taken by the industry, the report said.