To encourage investments in the bad loans space, the Union Budget has proposed slashing the tax deducted at source (TDS) on income payable to an investor in respect of investments made in a securitisation trust to 10 per cent, across the board.
Currently, the TDS on income derived from a securitisation trust constituted under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002, is 25 per cent if the investor is an individual or a Hindu Undivided Family (HUF) and 30 per cent in the case of any other person.
‘This is positive for investors in Security Receipts (SRs) and will ease cumbersome process of deduct first and claim refund later, said Hari Hara Mishra, CEO, Association of ARCs in India, & Member, IMC’s Banking, NBFC and Finance Committee.
ARCs acquire stressed loans from financial institutions at haircut and issue SRs.
About a year back, the Association of ARCs in India had requested the finance ministry to rationalise the TDS in respect of income payable by a securitisation trust to an investor. It underscored that the TDS at 25 per cent/30 per cent, depending on the category of investor, is unreasonably high. The ministry has now acquiesced to its request to revise the TDS downwards.
Crisil Ratings, in a recent report, noted that the cumulative recovery rate of SRs issued by ARCs is set to jump up for the second straight year by up to 15 percentage points per annum, touching 75-80 per cent by next fiscal. The cumulative recovery rate is the ratio of cumulative recoveries to cumulative SRs issued.
Three reasons
The credit rating agency said there are three reasons for the improvement in the cumulative recovery rate of SRs: healthy performance of stressed assets in key infrastructure sectors (real estate, thermal power and roads); higher share of retail and low vintage assets; and lower growth in new acquisitions in comparison to incremental recoveries.
In addition, the improving performance of stressed assets in these infrastructure sectors and the deterrence effect of the Insolvency and Bankruptcy Code (IBC) are impelling debt restructuring, which is emerging as a most-preferred resolution strategy and a win-win for both promoters of the stressed assets and ARCs.