ARCs with strong capital backing to stay relevant, says report

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Mumbai | October 8, 2018 6:24 PM

Asset reconstruction companies (ARCs) with strong capital backing would be able to evolve their models successfully in the near to medium term and remain relevant, a report said Monday.

Asset reconstruction companies, MSME, SME debt, SME loans, India Ratings and ResearchIt said ARCs are very critical to the country’s economy as they have significant expertise in dealing with micro, small and medium enterprise (MSME) businesses.

Asset reconstruction companies (ARCs) with strong capital backing would be able to evolve their models successfully in the near to medium term and remain relevant, a report said Monday. ARCs will play a significant role in resolution of mid-sized assets that would be commensurate to their capital, India Ratings and Research said in its report. “ARCs that are backed by large groups with strong capital commitment, capability to evaluate transactions using group synergies and ability to find equity investors would be able to evolve their models successfully in the near to medium term,” the rating agency said.

It said ARCs are very critical to the country’s economy as they have significant expertise in dealing with micro, small and medium enterprise (MSME) businesses. “The ARCs’ increased focus on mid-sized assets would also free up the bandwidth of banks to focus on larger cases that contribute to a greater proportion of the NPAs on their books,” the agency said.

According to the report, relative to pre-2012 period, ARCs have reported a worse cumulative average recovery for the security receipts (SRs) issued during 2012-2017. The average recovery amount on the SME debt acquired for the recent vintage (2012-2017) SRs has been just a third of the average recovery observed for SRs issued in the 2006-2011 period, it said.

The report said ARCs paid more than twice the price in 2012-2017 relative to that paid in 2006-2011 vintage, resulting in a much worse redemption track record on the SRs backed by SME loans.

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