New RBI norms to help orderly development of ARCs

Aug 17 2014, 12:14 IST
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SummaryRBI guidelines on ARCs will result in greater alignment of interest between these Comp and other investors.

The recent Reserve Bank guidelines on asset reconstruction companies (ARCs) will result in greater alignment of interest between these companies and other investors, which in turn will lead to an orderly development of the sector, says a report.

The RBI hiked ARC's investments in securities receipts by three-fold to 15 per cent.

"As an outcome of the greater investment by ARCs, they would negotiate for lower price for acquiring bad debt. As a result, the average pricing of around 60 per cent for debt acquired from 2012 to 2014 may need to come down by 50 per cent," India Ratings senior director for structured finance, Sandeep Singh said in report.

The RBI tightened the norms for ARCs following a massive spike in their assets under management saw a four-fold increase to Rs 42,000 crore observed in the previous year.

The offloading was led by SBI which for the first time history had in Q4 of last fiscal sold Rs 3,700 crore worth of bad loans to ARCs while in the June quarter it jacked the same up to Rs 5,566 crore.

There are 14 ARCs in the country comprising the Asset Reconstruction Company of India, floated by the banks, and 13 privately owned.

Singh also said that the new RBI directives will also lead to orderly development of the ARC sector.

The report said the ARCs have on an average redeemed 68 per cent of the security receipts (SRs) issued from 2006 to 2010 in spite of a challenging regime for resolution of assets.

It said that given the slow pace of judicial resolutions, the ability of ARC trusts to extend their life by another three years beyond the original five years, has helped ARCs extract better recoveries.

"The SRs backed by retail bad loans performed very well and recorded recoveries of 123 percent of SRs issued, while SRs backed by SME loans came in second with an 85 percent recovery of SRs issued during 2006-10," Singh said.

India Ratings said the recent RBI efforts towards early identification and resolution of bad debts through the joint-lenders forum, along with incentives and penalties will lead to better performance of corporate bad debts in future.

The agency believes that a significant improvement in the insolvency regime is fundamental to the health of ARCs. It would require the finance ministry to intervene and set up more debt recovery tribunals (DRTs), with sufficient manpower to

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