Asset Reconstruction Companies (ARCs), which buy non-performing assets (NPAs) or bad loans from banks, are eying a larger pie of stressed assets.
In a letter to the Reserve Bank of India (RBI) earlier this month, ARCs urged the central bank to allow them to acquire financial assets from asset management companies (AMCs) and alternative investment funds (AIFs). This will not only help in the speedy resolution of stressed assets but will also provide exit option to mutual funds and AIFs, they said.
Presently ARCs are only allowed to acquire stressed assets from banks and financial institutions. It is usual for AMCs and AIFs to invest in debentures and bonds of companies. After these firms or their assets turn into NPAs, the AMCs and AIFs get stuck in such bad assets. If ARCs are permitted to buy these assets, it will give exit option to such investors.
“Allowing ARCs to buy assets from AMCs, AIFs and FPIs will help in comprehensive solution for all players in the financial system and lead to better outcome in resolution of assets,” Hari Hara Mishra, CEO of the Association of ARCs in India told FE.
Mishra added that in many cases, there is a difference of opinion about resolution plan between bankers and representatives of AMCs and AIFs which causes unnecessary delay. And by allowing ARCs to buy from them as well, the process can be become faster.
Two years back, the Sudarshan Sen Committee in its long list (42) of recommendations had said that ARCs should be allowed to invest in AIFs. However, while a few of those recommendations were implemented, this went into cold storage.
On their part, mutual funds and AIFs have often lamented that there aren’t many buyers of papers that are either downgraded or defaulted and these papers tend to be illiquid. The corporate bond market, in general, is relatively illiquid and for papers of lower credit quality, it is hard to find a buyer.
“The liquidity is poor for paper of lower credit quality, so if ARCs are allowed to buy these papers it will provide much needed liquidity and it will also help in broadening the corporate bond market,” G Pradeepkumar, CEO, Union Mutual Fund told FE.
Meanwhile, ARCs continue to witness a healthy growth in acquiring new assets. The book value of bad loans acquired by them reached Rs 7,66,915 as of March 2023 from Rs 5,88,706 crore as of March 2022, registering a growth of nearly 30 percent, as per the data of Association of ARCs in India.