Rise in bad loans may spawn more ARCs

While rising non-performing loans is bad news for banks, it seems to be good news for those wanting to set up Asset Reconstruction Companies (ARCs).

In the last nearly one year, four new ARCs have set up shop and even existing players are looking to boost their capability to help cleanse the banking system.

As of March-end 2017, the banking system is reeling under ₹12-lakh crore worth of stressed assets (gross non-performing loans plus restructured advances), providing a happy hunting ground for ARCs.

According to latest Reserve Bank of India data, 19 ARCs were registered with it as on August 31, 2016 while the Association of ARCs in India’s membership currently stands at 22. So, three new members — Ambit Flowers Asset Reconstruction Pvt Ltd, Raytheon Asset Reconstruction Pvt Ltd, and Suraksha ARC — came on board the Association in the last one year or so.

A couple of months ago, Indiabulls Ventures announced that its wholly-owned subsidiary Indiabulls ARC has been granted the Certificate of Registration by the RBI. This takes the total number of ARCs in the country to 23.

Ambit Flowers ARC is a joint venture between Ambit Holdings and US-based private investment firm JC Flowers.

Suraksha ARC is sponsored by Sudhir Valia, Executive Director, Sun Pharmaceutical Industries, and Vijay Parekh, a first generation entrepreneur with 20 plus years experience in real estate.

Raytheon ARC has been floated by Anil Bhandari, who has 23 years experience, including 13 years in banking, with exposure to legal/ recovery including restructuring/ one-time settlement/ Board for Industrial and Financial Reconstruction, etc.

ARCs act as debt aggregators by acquiring non-performing loans from the banking system, managing and recovering illiquid NPLs by putting them on the resolution path, according to an Assocham report. In the process, ARCs help unlock capital for the banking system held in NPLs, thereby helping banks to focus on core activities and put the underlying assets held as security (industrial and other assets) back to productive use at sustainable values through resolution.

Rashesh Shah, Chairman and CEO, Edelweiss Group, said, “Our ARC business (Edelweiss ARC) is scaling up well. We expect that in the next three-four years as all these NCLT (National Company Law Tribunal) cases happen, there will be a lot more demand (for the services of ARCs and stressed asset funds).

“I think ARCs and stressed asset funds will provide capital and exit to banks. Our estimate is that every year about ₹20,000 crore of cash will need to be deployed (for buying out stressed assets from banks, pumping in additional capital into these companies, buying equity in these companies, providing priority funding, etc) in the stressed asset market. Of this, we are hoping to deploy about ₹3,000-4,000 crore.”

Credit rating agency Crisil, expects that with the RBI taking a series of steps, including increasing net-owned funds requirement for ARCs to ₹100 crore from ₹2 crore, to strengthen the ecosystem, more players with deep pockets will be attracted to set up ARCs. The RBI’s move will enhance transparency in transactions, improve recoveries and open up scope for consolidation.

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