The Reserve Bank of India’s directive for Asset Reconstruction Companies (ARCs) to increase their investment in security receipts (SRs) to 15 per cent from the existing 5 per cent will lead to greater alignment of interest between Companies and other investors, said India Ratings & Research.
The credit rating agency further said this will lead to orderly development of the ARC sector.
“As an outcome of the greater investment by ARCs, they would negotiate for lower price for acquiring bad debt.
“As a result the average pricing of approximately 60 per cent for 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 that 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 another three years beyond the original five years has helped ARCs extract better recoveries.
Close to 65 per cent of Trusts closer to their five year tenure in Ind-Ra’s rated portfolio have had to seek approval from the ARCs’ Board for extension of maturity.
The agency said SRs backed by retail non-performing loans (NPLs) performed very well and recorded recoveries of 123 per cent of SRs issued, while SRs backed by SME loans came in second with an 85 per cent recovery of SRs issued (during 2006-2010).
However, large corporate NPLs lagged with realised recoveries at 60 per cent of the SRs issued, said Mithilendu Jha, Associate Director, Ind-Ra.
Ind-Ra is of the view that the recent efforts by the Reserve Bank of India towards 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 in the future.
Further, a significant improvement in the insolvency regime is fundamental to the health of the 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 getting referred to the Tribunals.
Regulations for the transfer of cases to other DRTs in the absence of officers at local DRTs should be in place.
ARCs have largely resorted to out-of-court settlements in order to reach faster resolution keeping in mind the costs associated with long-drawn-out judicial processes.
The recent amendments to the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act are expected to empower lenders. However, the practical utility of amendments to the Act remains to be seen.