Asset Reconstruction Companies (ARCs) have been created under a special statute SARFAESI Act, 2002 as an institutional framework for acquiring NPAs (non-performing assets) from banks and other financial institutions. They are registered with and regulated by the RBI. The only permissible business for ARCs is asset reconstruction and related activities.
There has been an exponential growth in NPAs of banks with the present level at around Rs 9 lakh crore. Banks try to resolve the NPAs through various measures like resolution both within IBC and outside. They also seek settlement with the borrower or enforcement through DRT and SARFAESI.
However, all this requires time, manpower and costs of recovery. So, banks also resort to the sale of NPAs to ARCs for a quick exit and as a tool for balance sheet management. Continuance of huge NPA is investor negative, and the market discounts shares of such banks heavily and raising of funds from the market for bank's growth becomes difficult.
At present, there is no customised loan product or funding support to ARCs in a structural way. In a paper 'Framework for Revitalising Distressed Assets in the Economy' in January 2014, the RBI had suggested allowing banks to extend finance to 'specialised' entities put together for the acquisition of troubled companies. It further read; the lenders should, however, ensure that these entities are adequately capitalised.
Certainly, ARCs are specialised entities and in 2017, the minimum net worth of ARCs was enhanced 50 times by the RBI from Rs 2 crore to Rs 100 crore to boost their capital base.
ARC as a sector needs to grow and its effectiveness will increase only if the funding support is made available through a dedicated asset reconstruction fund which may be set up by the banks.
The loans may be made available to ARCs with a demonstrated resolution track record. The purpose of a loan could be:1. Acquisition of assets either through NPA Sales by banks or through a resolution plan under IBC
2. Working Capital and start-up assistance for the revival of acquired stressed units
3. Repayment should be linked to the resolution plan, not exceeding 8 years
4. Periodicity of interest, servicing should be linked to cashflow from underlying asset
5. Such advances need to be treated as a priority sector, as the revival of unit generates jobs and revenue for authorities from operations of the unit.
6. The Corpus, to start with, could be Rs 30,000 crore (calculation below).
NPAs in the system- Rs 9 lakh crore (approx.)
Say 10% thereof sale to ARCs- Rs 90,000 crore
Average Pricing - Say 40% as per Trend- Rs 36,000 crore
ARC Margin say 20%- Rs 7,200 crore
Corpus required- Rs 30,000 crore (approx.)
Such liquidity support will help revive sick units and will recycle banks' idle provision stuck off, for fresh credit creation and support growth of the economy. In essence, it is monetising banks provision cover for book building and earning yield.
(The author is a director in an Asset Reconstruction Company. Views are personal)