The Centre’s decision to hike foreign investment cap in asset reconstruction companies (ARCs) from existing 49 percent to 100 per cent has come as a huge booster dose for the asset reconstruction industry.
This is highly encouraging as the stage would now expand to include global players in the Indian ARC sector, P. Rudran, Managing Director and CEO, Arcil told Business Line .
This decision has come at a time when non-performing assets in the banking system are on the rise.
Arcil is the country’s first asset reconstruction company. Currently, about 15 percent of its equity capital is held by foreign institutions.
While FDI up to 49 per cent will be allowed under automatic route, any foreign investment beyond this level will be allowed only under approval route, according to the latest decision.
“It (raising the FDI cap) is good for the industry as it will encourage more ARCs to be set up,” Rudran said.
Existing investors in ARCs too can benefit as they can look to unlock value in such entities by offloading stake in them to foreign investors, it was pointed out.
Arcil is mainly in the business of buying bad loans from banks (at a discount) and recovering the dues.
Our Mumbai Bureau adds : Unless the ARC model undergoes a radical change, allowing 100 per cent FDI will only have limited short-term benefit, said Rajiv Ranjan, former CEO of an ARC.
He pointed out that currently banks are offloading those non-performing loans (NPLs) that they are not able to recover themselves.
If these loans, which have been non-performing for eight to 12 years, are bought at auctions then there is very little that the ARCs can recover.
ARCs will thrive only if the RBI makes it mandatory for banks to sell the NPLs, which they have not able to resolve for, say, three years after being downgraded, said Ranjan.
Moreover, in India, to buy a pool of NPLs an ARC, on an average, shells out about 26 per cent of the outstanding loan amount to the bank.
This asking rate is steep as compared to just 3 per cent overseas.