New RBI norms likely to hurt asset reconstruction firms

Asset reconstruction companies (ARCs) will see a reduction in business growth as banks are likely to benefit from faster resolution of bad assets under the new RBI guidelines.

Banks have been increasingly selling bad assets to ARCs in a bid to clean up their balance sheets.

Even as the new guidelines bring in more discipline with better realisations for banks, ARCs will have to bear the brunt.

Under the guidelines, when a bank sells an asset to an ARC, the latter has to invest 15 per cent (earlier it was 5 per cent) in security receipts (SRs).

Also, the planning time for NPA realisation or initial valuation of the SRs has been cut to six months from 12 months currently, which means immediately after six months ARCs have to get the SRs to be rated by a credit rating agency.

A senior official of an ARC said, more than the profitability, the guidelines will have an impact on ARCs’ assets under management (AUM).

According to the official, “We will see a reduction in our business as we will buy less due to the high upfront payment to banks because capital of all ARCs is quite low with limited ability to borrow money.

“Our volumes — the amount of NPA sold and purchased — will reduce by 50 per cent with the new guidelines. The management fees will also go up. In addition, the pricing will be quite realistic as we have to pay more to banks now,” he added.

P Rudran, Managing Director and CEO, Arcil, said his firm has not reduced the growth target of ₹5,000 crore this fiscal year. “So far, we have bought a little less than ₹1,000 crore. We will work out the new mechanisms depending on the banks and our acceptability of the new norms. Though we have adequate capital, it may take some time (to work out the new mechanism),” he said.

There are 14 registered ARCs in India, of which, only four are active. The pressure to build books had forced ARCs to make unrealistic valuations. “ARCs’ total AUM had increased four-fold to ₹42,000 crore in the year till June 30, 2014. This growth is expected to moderate to 30 per cent in the following 12 months because of the amendments to regulations announced by the RBI,” a Crisil report said.