Asset reconstruction companies (ARCs) would increasingly opt to become part of a multi-platform business model with co-investors/large funds to bring in capital, and stay relevant, according to a report by Assocham and Crisil.
This is because the existing capital base of ARCs cannot absorb the stressed assets available in the market.
Forecasting gross non-performing assets (GNPAs) to rise to ₹9.5 lakh crore by March-end 2018 (from ₹8 lakh crore as at March-end 2017), the report said the opportunity for ARCs is significant.
Given that banks are expected to make higher provisioning over and above those made for stressed assets, they may sell the assets at lower discounts, thus increasing the capital requirement of ARCs.
“Capital remains a major challenge. Increased stringency in the provisioning norms for investment in SRs (security receipts) will push up cash-based sale of stressed assets.
“Furthermore, the Reserve Bank of India has raised the net owned funds for existing ARCs to ₹100 crore (from ₹2 crore) effective April 1, 2019. All this will, in turn, necessitate higher capital requirement for ARCs,” said Ashu Suyash, MD and CEO, Crisil.
Partnership route
Given the capital constraints, partnership is the way forward. Crisil believes that ARCs would increasingly opt to become part of a multi-platform stressed assets play rather than going it all alone.
Such a platform will comprise stressed asset funds (which with their significant technical expertise in resolution/turnaround can directly and opportunistically invest in stressed companies or SRs); ARCs; and non-banking finance companies (which can plug the financing gap and can also co-invest in SRs).
The Assocham-Crisil report said of the 24 ARCs in India, around six are comfortable in terms of the revised net-owned funds requirement 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.
Structural shift
Going forward, Crisil sees a structural shift in the ARC industry.
Large players with deep pockets will dominate the market and smaller players will consolidate with larger ones, given the capital constraints. However, discounts will increase, because valuation becomes critical with more and more cash deals (which further increases the capital requirement for acquisition).
Also, the percentage of SRs with banks for new assets will decline, while the number of cash deals will increase.
Given the structural shift due to the swirl of regulatory changes that have kicked in recently, Crisil assessed that the growth of ARCs’ assets under management (AUM) is expected to come down significantly. This is primarily because of capital constraints.
The credit rating agency expects AUM growth to fall to around 12 per cent until June 2019 (from 22 per cent year-on-year growth in June 2017).
“Sales are expected to be impacted in the near term, as both sellers and buyers adjust to the new norms.
“Having said that, it is important to note that the AUM is still expected to reach almost ₹1 lakh crore by June 2019 (from ₹78,400 in June 2017), and that is fairly sizeable,” the report said.