The Reserve Bank of India’s directive to asset reconstruction companies (ARCs) to increase their investment in security receipts (SRs) to 15 per cent from 5 per cent now will lead to greater alignment of interest between ARCs and other investors, said India Ratings & Research.
The credit rating agency further said this would lead to orderly development of the ARCs.
“As an outcome of the greater investment by ARCs, they would negotiate for lower prices when acquiring bad debt. As a result, the average pricing of approximately 60 per cent of debt acquired from 2012 to 2014 may need to come down by 50 per cent,” said Sandeep Singh, Senior Director, India Ratings & Research (Ind-ra). The agency feels the ARCs have, on an average, redeemed 68 per cent of the SRs issued from 2006 to 2010, in spite of a challenging regime for resolution of assets.
However, given the slow pace of judicial resolutions, the ability of ARC Trusts to extend their life by three years beyond the original five has helped ARCs achieve better recoveries. Close to 65 per cent of Trusts that are nearing the end of their five-year tenure in Ind-Ra’s rated portfolio have had to seek approval from the ARC Board for extension of maturity.
SRs backed by retail non-performing loans (NPLs) performed very well, recording recoveries of 123 per cent of the receipts issued, while SRs backed by SME loans came in second, with an 85 per cent recovery of receipts issued (during 2006-2010).
“However, large corporate NPLs lagged with realised recoveries at 60 per cent of the receipts issued,” said Mithilendu Jha, Associate Director, Ind-Ra.
Ind-Ra is of the view that recent efforts by the Reserve Bank of India for early identification and resolution of bad debts through the Joint-Lender-Forum, along with incentives and penalties, will lead to better performance of corporate NPLs. A significant improvement in the insolvency regime is fundamental to the health of ARCs. This would require the Ministry of Finance to intervene and set up more debt recovery tribunals (DRTs), with sufficient manpower to handle the number of cases being referred to the Tribunals.
Regulations for the transfer of cases to other DRTs in the absence of officers at local DRTs should also be put in place.
ARCs have largely resorted to out-of-court settlements to reach faster resolution, keeping in mind the costs associated with the long drawn out judicial processes.