Money & Banking

RBI may tweak rules to reduce ARCs’ cash outgo when buying stressed assets

K Ram Kumar Mumbai | Updated on July 13, 2021

The lowering of the ‘skin in the game’ requirement will encourage ARCs to step up purchase of bad loans   -  Getty Images/iStockphoto

Strategic investors willing to bring in a bulk of the price

The Reserve Bank of India may tweak the ‘skin in the game’ criteria for Asset Reconstruction Companies (ARCs) in cases where they link-up with an investor to buy stressed assets from lenders on 100 per cent cash basis.

The central bank is examining the possibility of lowering an ARC’s contribution to acquire a stressed asset on all-cash basis from 15 per cent of the acquisition price to 2.5 per cent to 5 per cent.

The reason for this is that there are investors willing to bring in a chunk of money (95-97.5 per cent of the acquisition price) for buying stressed assets.

Given banks’ preference to sell their stressed assets on all-cash basis, the lowering of the ‘skin in the game’ requirement will alleviate ARC’s capital constraints and encourage them to step up purchase of bad loans. This, in turn, will help banks clean up their books. In cases where ARCs acquire stressed assets through a mix of cash and stressed assets, they are required to invest a minimum of 15 per cent of the security receipts. Hari Hara Mishra, Director, UV ARC, observed that in three years from 2018 to 2020, the cash component of purchase consideration paid by ARCs to seller banks and financial institutions went up three times from 28 per cent to 87 per cent.

“There is a long-felt need to reduce minimum contribution by ARCs in 100 per cent cash transactions from existing 15 per cent to 2.5 per cent in line with guidelines as applicable to Alternative Investment Funds (AIFs),” he said.

Reducing stress in sector

Mishra emphasised that this would enable ARCs to arrange more funds and absorb more non-performing assets, thereby reducing stress in the financial sector.

Pallav Mohapatra, MD & CEO, ARCIL, said: “What we want is that when an ARC, along with an investor, acquires a stressed asset on a 100 per cent cash basis from a bank, in such cases the regulator should, I think, reduce the 15 per cent requirement of contribution by ARCs. This can be reduced to 5 per cent.”

Mohapatra underscored that investors are proactive when it comes to seeking regular updates on resolution of stressed assets and recovery. Hence, ARCs will be on their toes despite lower skin in the game.

Published on July 12, 2021

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