Asset reconstruction companies (ARCs) will play a limited role in absorbing non-performing assets (NPAs) of banks due to capital constraints and rising acquisition costs, India Ratings and Research (Ind-Ra) said in a report on Wednesday.
It said capital is constrained due to higher investment requirements in security receipts for ARCs and shareholding ceiling for sponsors at below 50%. “ARCs are now tapping debt markets to raise funds, which is a shift to leverage from the near-zero debt model earlier. Also, interest coverage may be a concern due to the lack of predictability in ARCs’ cash flows,” it said.
According to India Ratings, ARCs play a crucial role in the financial sector and help banks clean up stress loans, which is the need of the hour. The RBI has reiterated that forbearance regime has ended and it is unlikely to provide any further relaxation to banks on the classification of restructured assets.
Banks’ stressed loans (NPAs + restructured) as of March 2015 stood at 11.1% of the outstanding credit of R65.25 lakh crore, while all ARCs put together have a capital base of mere R4,000 crore. “ARCs, at best, have the ability to purchase NPAs worth around R1.2 lakh crore, which is a mere 17% of the total stressed assets in the system.
Acquisition cost has also been rising due to the shift of stressed assets into new NPAs where recovery is likely to be higher than for earlier seasoned NPAs. Acquisition cost has now gone up to around 60% from earlier around 40%,” India Ratings said.
It said acquisition cost has risen, given bankers are now selling stressed loans at an early stage. Also, earlier banks would offer NPAs that were more seasoned, while, of late ,they have resorted to offering even fresh NPAs, which has pushed up acquisition cost and led to bankers asking for higher amounts due to a higher probability of recovery.
Public sector banks are more aggressive in cleaning up their books than their private counterparts. According to the report, while the 10 largest public sector banks sold 6,040 accounts to ARCs in FY15 with a book value of Rs 11,140 crore, up 64% y-o-y, the top five private banks sold a much smaller quantity of assets, with 1,100 accounts sold in FY15 worth Rs 1,110 crore.