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Friday, 08 August 2014 00:45
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Shobhana's edit

RBI gets it right on Asset Reconstruction Companies

Sales of non-performing loans to Asset Reconstruction Companies (ARCs) may have jumped to R34,000 crore, driving up the assets under management (AUM) to R42,000 crore, but that might really not have been such a good thing. For one, much of it was being driven by Security Receipts (SR) so that most of the risk remained with the banks. For their part, ARCs were willing to be accommodative when it came to valuing the assets since they forked out just 5% of the amount, banking on the fees to grow their bottom lines. A lot of this will now change after the Reserve Bank of India (RBI) rewrote the rules on Wednesday. The central bank, rightly, wants ARCs to have more skin in the game and, to this end, has upped the initial payment, requiring ARCs to be better capitalised. As a consequence, CRISIL estimates growth will moderate to 30% in the current year but there will be more discipline all around. To begin with, ARCs will not be so cavalier about how loans are priced since they need to cough up 15% of the value rather than just 5%, which means the pricing will be more realistic since capital doesn’t come cheap. And like before, they will need to stay invested for the entire duration of the SR. Also, while the fees have so far been calculated as a share of the value of the assets acquired, the income will now be booked as a percentage of the net asset value (NAV) to be determined by a rating agency. One might argue the ARC will simply up the fees, but that might not be so easy in a competitive environment.

Hopefully, that will lead ARCs to focus more on what is called resolution and recovery—essentially figuring out how the asset can generate cash flows. Perhaps the best step RBI has taken is to allow the ARCs to become members of the Joint Lenders Forum (JLF). What that will do is to help speed up debt aggregation—essentially allow the ARC to ‘buy out’ the loans quickly and in ample quantities so that it can act fast. Indeed, where it took ARCs anywhere between 18 and 30 months to acquire the bulk of the loan, it is possible ARCs will take over most of it even as it is starting to turn bad; as the central bank has pointed out, time is of essence since assets that are already partly rotten can decay quickly. The new rules will, hopefully, encourage ARCs to focus on recovery.


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