While banks are estimated to generate Rs 60,000 cr of NPAs in FY16, capital constraints and expectation mismatch on valuations would allow ARCs to buy only 20% of those assets, says a report
Bad loans worth as much as Rs 12,000-14,000 crore are expected to be bought by asset reconstruction companies (ARCs) in FY16, an Assocham-Crisil report said on Tuesday.
While banks are estimated to generate Rs 60,000 crore of non-performing assets (NPAs) in FY16, capital constraints and expectation mismatch on valuations would allow ARCs to buy only 20% of those assets, it said. Under the new regulatory regime, ARCs with deep pockets and ability to raise capital will benefit.
Bad loans, the report said, are seen rising mainly because of withdrawal of regulatory forbearance on restructuring and high slippages from recast assets — as much as 40% of assets restructured between FY11 and FY14 have degenerated into NPAs.
“Assets under management of ARCs will grow slower at 11% (net of redemption) in fiscal 2016 and fresh issuances of security receipts (SRs) will grow around 18%, as they grapple with the new guidelines,” the report said.
Though ARCs have successfully reconstructed several large accounts and demonstrated ability to recover money through asset sales, recovery levels have not been up to potential as cumulative redemption ratio of SRs in 10 years to June 30, 2013, stood at 53%.
In FY15, lenders sold NPAs worth Rs 20,000 crore to ARCs out of more than Rs 90,000 crore of assets put on sale, P Rudran, MD & CEO, Asset Reconstruction Company India (ARCIL), had said. In FY14, banks had offered assets worth Rs 40,000 crore and ARCs bought loans amounting to Rs 22,000 crore.
Last year, the RBI had asked ARCs to increase the mandatory upfront investment in SRs to 15% from 5% in to ensure ARCs have ‘more skin in the game’.