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The performance of asset reconstruction companies (ARCs) in management of stressed assets of banks/financial institutions (FIs) since inception in 2003 is still uneven on several parameters, according to a Reserve Bank of India’s Committee to Review the Working of Asset Reconstruction Companies.
Overall recovery made by the ARC sector during FY04-FY13 was 68.6 per cent when measured in terms of redemption of Security Receipts (SRs), which are issued by ARCs as part of securitisation of assets acquired, as a percentage of total SRs issued, the report said.
However, the same comes down to 14.29 per cent when the redemption is measured in terms of the book value of the assets acquired.
RBI panel favours sale of stressed assets by lenders at early stage
“This implies that banks and other investors could recover only about 14 per cent of the amount owed by their borrowers,” the committee headed by Sudarshan Sen, former Executive Director, RBI, said.
The total SRs issued reflects the cost of acquisition for the ARCs vis-à-vis the book value of such financial assets. Redemption of SRs is a proxy for the amount recovered from these accounts.
ARCs are required to resolve the assets within a maximum of eight years of acquisition of financial assets and redeem the SRs representing the assets. Therefore, the period after FY13 has SRs for which resolution is still underway.
Winds of change in the stressed assets market
Business revival
The committee observed that ARCs’ performance in ensuring revival of businesses has also been poor. The data indicate that approximately 80 per cent of the recovery for the sector, so far, has come through deployment of methods of reconstruction that do not necessarily lead to revival of business.
“ARCs have rarely used methods such as change in or takeover of the management of the business of the borrower or conversion of debt into equity in a borrower’s company,” the panel said.
Rescheduling of payment of debts was also involved only in 19.9 per cent of the recovery made by ARCs.
The committee underscored “The overall performance of ARC Sector has left much to be desired. However, it would be incorrect to assume that the problems of ARC sector are entirely of its own making. In fact, the ageing of NPAs before their sale may be contributing to poor recovery. This gets further aggravated by lack of debt aggregation.”
Revival of stressed business typically requires additional funding which is difficult to come by for old NPAs.
“Inadequate capital at ARC level and the regulatory prescription limiting the extent of funds that could be raised, from external investors through securitisation, seems to have made ARCs’ attempt at revival of businesses even more difficult. ARCs’ lack of skill sets in turning around borrowers cannot be ignored,” the committee said.
The panel emphasised that despite the reshaping of the ecosystem available for lenders for handling of stressed assets and the ARC sector’s sub-optimal performance and its challenges, the ARC model remains relevant as a private sector led permanent institutional framework for out-of-court resolution of stressed assets of the financial sector.
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