With rules tightened, further consolidation seen in ARC space

The market share of top five asset reconstruction companies (ARCs) will consolidate further and smaller ARCs may merge with larger rivals, or they could become takeover targets for large private equity investorsfollowing tightening of regulations, said credit rating agency Crisil.

In a response to RBI’s recent proposal to increase net owned funds (NOF) to ₹100 crore (from ₹2 crore) for asset reconstruction companies (ARCs), the agency, in a report, assessed that of the 23 ARCs in India, only six are comfortable in terms of the revised NOF requirements and other stringent regulations.

However, ARCs that struggle to infuse capital or raise external funding, and are short on specialist manpower will get marginalised further, the agency said.

“Given the thicket of rule changes, larger ARCs would be on a firmer footing, especially those backed by strong promoter groups with the ability and intent to infuse capital, and relatively better capability to attract capital from external sources, given that 100 per cent foreign direct investment is permitted in the sector” the report said.

Krishnan Sitaraman, Senior Director, Crisil Ratings, said in the report: “The top five players account for approximately 90 per cent of total assets under management. With regulations tightening, we believe their market share will consolidate further and smaller ARCs may merge with larger rivals, or they could become takeover targets for large private equity investors and stressed asset funds wishing to enter the business.”

From April 1, 2017, the RBI has increased the provisioning requirement for banks investing more than 50 per cent of the value of stressed assets (the limit subsequently to be reduced to 10 per cent from fiscal April 1, 2018) sold by them in the security receipts (SR) issued in lieu.

The regulator intends to ensure that any NPA (non-performing asset) sale is a true sale conducted through a transparent process where the ARC ends up with significant skin in the game so as to maximise recoveries.

The strengthening of this framework could positively affect the volume of asset sales as banks are reluctant to take adequate haircuts. However, it will lead to more cash-based sale of stressed assets, which, in turn, would necessitate higher capital. That would benefit the larger ARCs.

Asset sales spiked in fourth quarter of fiscal 2017 before the new provisioning norm kicked in, according to the report. The agency estimated that about ₹21,000 crore of stressed assets were sold in this period and that the total outstanding assets under management with ARCs as on March 31, 2017, was about ₹75,000 crore.

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