MUMBAI: India Ratings on Monday offered an unsolicited advice to Asset Reconstruction Companies (ARCs) — to channelise their energies solely on acquiring mid-sized assets in the near-to-medium term. Besides, ARCs with corporate backing will remain relevant, while retail loan recoveries fared better than SMEs and large corporates.
“Retail loans achieved the highest average cumulative recovery of 150 per cent of the Security Receipts (SRs) issued, while SME loan trusts recovered 95 per cent. Recovery on SRs for large corporate loans at 73 per cent of SRs was lesser than that of SME and retail non-performing asset acquisition for ARCs,” Ind-Ra said in a note.
It added that ARCs would increasingly focus on mid-sized assets, given competition from bigger private equity players and the smaller role they would have in the outcome of larger cases with multiple lenders. Armed with the IBC, ARCs can expect greater cooperation from businesses for restructuring, requiring additional capital infusion. “This may help banks focus on large cases that are the main drivers of their NPA stocks,” it noted.
According to Ind-Ra, regulatory changes pertaining to the RBI guidelines on the sale of stressed assets dated September 2016 spiked bank provisioning norms, where their investments in SRs backed by sold assets are above 10 per cent of the SRs issued from April 2018.
Consequently, cash deals by ARCs shot up, bringing better price discovery and reducing the instances of SR deals to be entered into by banks. “However, a higher number of cash deals may result in capital becoming the biggest constraint for ARCs in cash acquisitions,” it hinted.
The ratings firm also believes ARCs with strong sponsor support can leverage group synergies and attract equity and investors. Ind-Ra analysed its overall rated portfolio of SRs issued by ARCs in the last decade, comprising SRs worth Rs 20,900 crore, backed by an underlying debt of Rs 45,100 crore as on December 2017.
It found that SR pricing and recovery on retail loans are far better than SME and large corporate loans. While aggressive pricing of large corporate loans is not in sync with relatively low historical recoveries, performance of SRs across ARCs for recent vintage SRs deteriorated compared to older vintage SRs, it said.