Acquisition of bad loans by ARCs to slow down, says Assocham-Crisil study

Non-performing assets (NPAs) worth about Rs 12,000-14,000 crore are expected to be bought by asset reconstruction companies (ARCs) in the current fiscal 2016, thereby, underscoring low systemic absorption capability, according to a just-concluded Assocham-Crisil joint study.

“Though gross NPAs of Indian banks will edge up in fiscal 2016 by 20 basis points to 4.5 per cent of advances i.e. by Rs 60,000 crore to Rs 4 lakh crore, only a fifth of the incremental NPAs are likely to be sold to ARCs,” noted a study titled ‘ARCs-The new normal: Growth tempered, recovery in the crosshairs.’

“Bad loans are seen rising mainly because of withdrawal of regulatory forbearance on restructuring and high slippage from restructured assets, as much as 40 per cent of assets restructured between fiscals 2011-14 have degenerated to NPAs,” the study conducted by industry body Assocham and credit rating agency Crisil said.

Assets under management (AUM) of ARCs will grow slower at 11 per cent (net of redemption) in fiscal 2016 and fresh issuances of security receipts (SRs) will grow around 18 per cent as they grapple with the new guidelines, highlighted the study.

“AUM of ARCs will taper to 11 per cent in fiscal 2016 compared with 30 per cent in 2015, which came atop a four-fold increase in 2014.”

A tougher environment has turned ARCs cautious about the quality and valuation of assets they acquire, which has slowed down growth in AUM to 30 per cent in fiscal 2015 after a four-fold jump in fiscal 2014.

Capital constraints, expectation mismatch on valuations, low recovery rates, and longer resolution time frames are among the reasons for the inadequate absorption capacity of ARCs.

According to the study, it is imperative for ARCs to innovate through models such as consortium bidding to acquire larger assets and share risks considering that access to capital remains critical.

“Any structural support such as access to the capital market or relaxation of 49 per cent sponsor contribution would ease capital constraints,” the study suggested.

Tapping new players such as private equity and distressed-asset funds could provide bridge loans or working capital funding to distressed assets, which is critical to reviving operations and value creation, suggested the Assocham-Crisil study.

Though ARCs have successfully reconstructed several large accounts and demonstrated an ability to recover monies through asset sales, recovery levels have not been up to potential as the cumulative redemption ratio of SRs in 10 years to June 30, 2013, stood at 53 per cent.

The study hopes for better recovery prospects driven by proactive regulations and positive steps being taken by the industry. “These changes will have a positive impact on the asset-value unlocking process in the long term and provide a much-needed fillip to the overall growth of the industry.”

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