ARCs need capital infusion to tackle Indian Banks' NPAs: Report

MUMBAI: Asset Reconstruction Companies (ARCs) which are playing a limited role in absorbing the booming non-performing assets (NPAs) of the Indian banks need capital infusion to be more effective, India Ratings and Research (Ind-Ra) said Wednesday.

Capital is constrained due to higher investment requirements in security receipts for ARCs and shareholding ceiling for sponsors at below 50 per cent. ARCs are now tapping debt markets to raise funds, which is a shift to leverage from the near zero debt model earlier. Also, interest coverage may be a concern due to the lack of predictability in ARCs’ cash flows, the Ind-Ra research said.

Currently banks’ stressed loans (NPAs+restructured) as of March 2015 stood at 11.1 per cent of the outstanding credit, while all ARCs put together have a capital base of mere Rs 4,000 crore. "ARCs at best have the ability to purchase NPAs worth around Rs 1.2 trillion which is a mere 17 per cent of the total stressed assets in the system. Acquisition cost has also been rising due to the shift of stressed assets into new NPAs where recovery is likely to be higher than for earlier seasoned NPAs. Acquisition cost has now gone up to around 60 per cent from earlier around 40 per cent," the report added.

Many Indian banks have lately also started involving specialists who can turnaround the stressed loans. Investment requirement by ARCs of the total security receipts issued increased to 15 per cent with effect from August 2014 from 5 per cent earlier. This has limited ARCs’ potential of buying large NPAs as capital remains a constraint. However, this guideline has also helped ARCs to refrain from aggressive bidding, bringing in the discipline needed in the industry.

"Banks are looking to clean up their books but are unwilling to sell NPAs at a significant discount. Headline stress loans on balance sheet are thus unlikely to decline. Credit costs will also remain elevated due to amortisation charges arising out of the losses on sale," the research report said.