ARCs told to invest 5% in security receipts against bad loan risk

MUMBAI: RBI has made the going tougher for asset reconstruction companies (ARCs) which deal in bad loans and have sweeping powers like enforcing securities and changing the management of defaulting companies. The regulator has asked ARCs to invest up to 5% in the security receipts (SR) issued by them to banks against the acquisition of bad loans.

By making them invest in SRs, the RBI wants ARCs to participate actively in risks involved in the bad loan market. So far, ARCs have acquired bad assets from banks by floating a special purpose vehicle which issues SRs to banks, instead of paying cash against acquisition of the bad loan. RBI has said ARCs will have to invest in SRs issued by their trust within six months from now.

Going by this rule, the ARCs will have to buy back 5% of SRs which they had issued so far. In the case of the ICICI-promoted ARC-Asset Reconstruction Company of India (Arcil), outstanding SRs stand at Rs 4,000 crore. It will be required to buy back up to Rs 200 crore from banks.

Arcil has a net worth of close to Rs 500 crore. “We, at Arcil, are in any case preparing to take risk on our balancesheet by providing credit-enhanced structure to the Indian QIBs and we are proposing to raise funds,” said Arcil’s MD and CEO, S Khansnobis. Other ARCs include UTI-promoted Asrec and IFCI-promoted Asset Care Enterprise. Some market players think this may create an entry barrier for potential entities who want to enter the ARC business.StanChart, Reliance Capital, several public sector banks and some retired bankers have all shown interest in floating an ARC.

ARCs issued SRs to banks that had sold their bad loans to them. However, since SRs were part of the investments, they are shown as standard assets in the books of banks. As per the norms, ARCs have to announce an NAV each year and banks have to mark to the market their SRs against it. Thus, even as they sold the bad loans to ARCs, the risk continued to remain in banks’ balancesheet. Now, the RBI wants ARCs to share this risk, along with the banks.