Money & Banking

RBI article calls for monitoring movement of funds between banks and ARCs

Our Bureau Mumbai | Updated on April 27, 2021

Banks not just major shareholders of and lenders to Asset Reconstruction Companies but also sellers of non-performing assets to them

It may be necessary to monitor if there is a circuitous movement of funds between banks and Asset Reconstruction Companies (ARCs), according to an article in the Reserve Bank of India’s latest monthly bulletin.

This observation comes in the backdrop of banks being not just major shareholders of and lenders to ARCs but also sellers of non-performing assets (NPAs) to them, it added.

Attracting ‘new money’ will be a challenge for the ARC

A movement of this kind can have implications for the genuine sale of NPAs and the overall growth of the ARC industry, said RBI officials Amarnath Yadav and Pallavi Chavan from the Department of Supervision, in the article.

The authors emphasised that given the private character of ARCs, they have tended to rely heavily on borrowings, particularly from banks, as a major source of their funds.

The article underscored that the capital base of ARCs is made up largely by domestic sources, particularly banks and financial institutions, with foreign sources remaining weak.

Being private sector entities, the key shareholders of ARCs are banks (29 per cent) and other financial institutions (37 per cent).

RBI set up 6-member panel to review working of ARCs

In order to boost their capital base, ARCs were allowed to accept 100 per cent of foreign direct investment (FDI) through the automatic route in 2016.

Notwithstanding the liberalisation relating to FDI, foreign entities account for a small portion (10 per cent) of the total capital of ARCs, the authors said.

Highly concentrated business

Although the number of ARCs has increased over time, their business has remained highly concentrated.

The authors assessed that of the total assets under management (AUM), about 62 per cent and 76 per cent was held by the top three and top five ARCs in March 2020, respectively.

Furthermore, in terms of the capital base of the industry, 62 per cent was held by the top three ARCs; the corresponding share was 67 per cent for the top five ARCs.

When it comes to acquisition of assets by ARCs, over time, although the average acquisition ratio (acquisition cost to book value of assets) has gradually risen, it remains in the range of 30-35 per cent, the article said.

There is a wide variation in the acquisition ratio also across sectors, it added.

Iron and steel, and power sectors are the two sectors having a relatively high concentration in acquired assets, as they are also ridden with NPAs. The acquisition ratio in these two sectors has been much lower (roughly about 45 per cent).

By contrast, hospitality (acquisition ratio: about 85 per cent) and real estate (about 70 per cent) account for a smaller share in total assets acquired, but their acquisition ratio has been relatively high.

Limited trading of SRs

Going by the resolution methods, ARCs prefer the method of rescheduling of the payment obligations (32 per cent as of March 2020) over other methods — enforcement of security interest (26.6 per cent); settlement of dues of borrower (26 per cent); by sale of business (13.9 per cent); and taking possession of assets (1.5 per cent).

The authors said banks continue to hold close to 70 per cent of the total Security Receipts (SRs) despite a change in the regulation disincentivising them from holding SRs above a specific threshold.

The authors observed that dominance of selling banks in holding SRs has often been described as a reason for limited secondary trading of SRs, despite the regulatory push to incentivise listing and trading of these instruments.

Published on April 27, 2021

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