The coronavirus pandemic and severe business disruptions caused by lockdowns have affected operations of various businesses in the country, including asset reconstruction companies (ARCs) who are expected to face disruptions in their recovery from non-performing assets procured from banks, according to an ICRA report.
As per the report, recovery for ARCs is getting affected due to deferment or failure of auctions on the back of unsatisfactory bids or absence of bidders, default or delay in payment as per the agreed settlement plan. Adding to it, resolution under Insolvency and Bankruptcy Code (IBC) proceedings has seen a sharp slowdown in Q1 FY2021, with only 16 corporate insolvency resolution processes (CIRPs) ending in resolution, compared to 35 in the previous quarter.
The Committee of Creditors (CoC) are planning to extend the bid submission deadlines due to lack of interest among bidders and to provide adequate opportunities to prospective resolution applicants for conducting due diligence.
Commenting on the effect observed on the ARC business, Abhishek Dafria, Vice President & Group Head - Structured Finance, ICRA, says, "Recovery for ARCs depends on the value realisation from the underlying securities, so willingness and fund availability with prospective acquirers is of utmost importance. As currently, the primary focus of the businesses is to set their own house in order first and preserve liquidity, acquirers are less keen to invest in further assets even when the same is available at attractive valuation."
ICRA evaluates the possible recovery from the non-performing assets of the ARCs and assigns recovery ratings on a scale of RR1+ to RR51 to the Security Receipts (SRs) issued by the ARC. Due to increase in the recovery timeline as well as decline in expected recovery value on the SRs, the rating agency has observed higher downgrades. Around 37 per cent of trusts issuing SRs have been downgraded (from rated portfolio), carried out on the basis of SRs outstanding as on June 2020, compared to 21 per cent rating downgrades observed in previous surveillance cycle (December 2019). Specifically, unresolved SRs in older trusts acquired in FY2015 or prior, have seen a higher proportion of rating downgrades.
"We expect the recovery ratings to remain under pressure over the near term until the economy improves such that interest of acquiring entities for the non-performing assets or their underlying securities returns. This could result in further provisioning requirements for ARCs and banks who are investors in the SRs," said Sankha Subhra Banerjee, Assistant Vice President, ICRA.
By Chitranjan Kuymar