The growth of asset reconstruction companies (ARCs) in India will moderate to 30 per cent in the next 12 months, according to credit rating agency Crisil.
This is because of the amendments to the regulations announced by the Reserve Bank of India on Tuesday.
“ARCs have witnessed very high growth in recent times, riding on business opportunities emanating from higher non-performing assets (NPAs) in the banking sector. Their assets under management (AUM) have increased four-fold to ₹42,000 crore in the year to June 30, 2014,” said Crisil in a statement.
The RBI has tightened the rules for ARCs to improve discipline and transparency in the sale and purchase of bad or non-performing loans.
As per the new rules, ARCs will have to pay upfront 15 per cent of the bid value of non-performing loans, against five per cent earlier. Also, those planning to buy bad loans will get more time (at least two weeks) to carry out due diligence before bidding for stressed assets.
In addition, ARCs will get up to six months instead of one year to plan recoveries from the non-performing assets acquired.
Crisil said that in the near term, “ARCs will find it challenging to align their pricing with the expectations of the asset-selling banks, given that the minimum investment requirement has been increased significantly. In the long term, however, the new rules will bolster price-discovery.”