Asset reconstruction companies (ARCs) would need to reorient themselves if they are to facilitate the resolution process of the ₹6-lakh crore bad debts in Indian banks, according to India Ratings and Research (Ind-Ra).
The credit rating agency observed that with the 15 per cent mandatory investment rule and capital constraints, ARCs would need to be supported by third-party capital for any meaningful movement on the bad debt issue.
Ind-Ra believes that the current capital position of ARCs can at best take care of 10 per cent of the bad debts in the Indian banking system.
Additionally, a debt-led strategy for investing in security receipts (SRs), leading to a debt-equity ratio of more than two times, could create liquidity issues for ARCs and may not be in tandem with the long gestation period for recovery in India.
While the current model, wherein banks invest in SRs backed by their own distressed debt has its own limitations, it could be useful for cases of liquidation in which further capital commitment is not required, said Ind-Ra.