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NPA woes: Voiceless ARCs too need a stimulus from the govt

In these years, ARCs have been able to play a limited role in containing NPAs by acquiring and resolving NPAs, major constraints being limited capital, inability to raise debt resources and price expectation mismatch with seller banks amongst others.

Hari Hara Mishra        Last Updated: August 16, 2019  | 14:36 IST
NPA woes: Voiceless ARCs too need a stimulus from the govt
Few years back in 2011, the Ministry of Finance had constituted a Key Advisory Group (KAG) on Asset Reconstruction Companies (ARC) sector reforms consisting of all stakeholders like banks, regulators, industry bodies, legal firms, consulting firms and ARC representatives etc.

Few years back in 2011, the Ministry of Finance had constituted a Key Advisory Group (KAG) on Asset Reconstruction Companies (ARC) sector reforms consisting of all stakeholders like banks, regulators, industry bodies, legal firms, consulting firms and ARC representatives etc.

After several rounds of deliberations, it came out with a set of recommendations relating to regulatory, legal, accounting and taxation aspects. The Group had suggested that the KAG on ARCs should function as a standing committee and meet at regular intervals to review the progress and developments on an ongoing basis.

However, since the report dated December 30, 2011, no further follow up in this regard has been undertaken and issues relating to ARC Sector do not get the attention that it deserves.

Also Read:LIC, IFC come to the aid of Ajay Piramal's financial services business

ARCs were created through a central legislation, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 as an institutional Framework to address Non-Performing Assets (NPAs) of the financial system.

Gross NPA ratio of the banking system used to register a continuous rise from 4.3% as on March 2015 to 11.5% as on March 2018. This trend has now been reversed during 2018-19 with Gross NPA ratio having declined to 9.3% as on March 2019.

In these years, ARCs have been able to play a limited role in containing NPAs by acquiring and resolving NPAs, major constraints being limited capital, inability to raise debt resources and price expectation mismatch with seller banks amongst others.

An NPA Ratio of 9.3% as at present is still extremely high and will drag the efforts to take Indian Economy to $5 trillion in the next 5 years. Besides, there are new stresses in other segments of the financial system like NBFC and Housing Segment and in this context, the role and effectiveness of ARCs need to be strengthened.

In India, most of the corporate borrowings have a consortium of lenders, and the major roadblock in resolution has been inter-creditor issues. Since its incipient days, ARCs functioning as a Debt aggregator have tried to address the issue and optimise realisation from underlying assets, by providing an aggregator platform.

Also Read: DHFL to submit restructuring proposal to lenders to repay all term, FD holders

They have also tried to restructure sustainable debt in deserving cases. However, due to several constraints in the operating landscape in areas of management control, Sale or lease of business, extending working capital etc - success stories, are few and far.

One important point is that ARCs are the only entities allowed to issue security receipts. In other words, ARCs can securitise cashflow with underlying Distressed Debt.

The recent Economic Survey talks of behavioural aspects. It may be interesting to note that the behavioural aspect of a borrower used to change, when a loan migrated to ARCs, because of single-minded pursuit approach to the resolution adopted by ARCs. In 15 years of working, ARCs have acquired resolution skill sets not available with any other set of institutional and regulated entity.

In the backdrop of growth rate slowing down in the economy, the Finance Minister Nirmala Sitharaman has taken the initiative to meet various stakeholders of the economy last week to come out with a stimulus package to kickstart the economy. For ARC sector, a few urgent measures below will help in enhancing their effectiveness and help them play a more meaningful role in the economy and optimal utilisation of skill sets acquired by them in the last one and half decades.

1. Liquidity

(a) ARCs are starved of Funds. There is no uniform policy across banks to extend financial assistance to ARCs. Since cleansing of bad debt is required to enhance credit creation capabilities of banks to kickstart growth, they should be encouraged to extend need-based finance to ARCs co-terminus with a resolution plan, which could be clubbed as priority sector advance.

(b) Investment in Security Receipts- At present with cash transactions dominating the NPA sales, ARCs are effectively working as Fund Manager. While Fund Managers under Alternative Investment Funds (AIF) mandate only 2.5% margin requirement from sponsor, with broadly similar role-play now in many cases, ARCs have to put in a whopping 15%. This needs review and rationalisation.

Also Read: Union Bank classifies Suzlon Energy's loan account as NPA; other banks may follow suit

2. ARCs as resolution applicant under IBC

While IBC encourages ARCs to play the role of a resolution applicant and gives certain exemptions available to banks and financial institutions- clear guidelines in investing in equity by ARCs in distressed companies directly and extending working capital are still awaited from regulators.

What is most important at this juncture is to acknowledge the existence of the ARC framework and restore the consultative process with ARCs to understand their operating constraints, remove the roadblocks and use the platform created by the Central Government through SARFAESI Act 2002 optimally, including the creation of a vibrant distressed debt market with securitisation and a trading platform.

(The author is associated with ARC industry since inception and has been part of various regulatory initiatives. Views are personal.)

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