MUMBAI: The stressed assets market is ruled by a handful of asset reconstruction companies (ARCs) though the major funding in this lucrative business is coming from foreign portfolio investors (FPIs) and ECB lenders.
A Reserve Bank of India (RBI) task force has recently called for allowing Foreign Portfolio Investors (FPIs) and ECB lenders to directly invest in the huge stressed assets market in India, which is currently an exclusive fiefdom of ARCs.
Foreign Portfolio Investors (FPIs) are presently allowed only to invest in stressed assets through SRs issued by ARCs. In fact, FPIs are not permitted to acquire any NPAs directly from banks or NBFCs, but come through the ARCs to participate in the distressed loan market.
Incidentally, the Reserve Bank vide circular dated July 30, 2019 has partially liberalized this position, but still requiring a big chunk of NPAs to go through the same modalities.
The total non-performing assets (NPAs) locked in the banks’ books as of March 31, 2019 have been estimated to be as huge as Rs9.5 lakh crore. Though substantial funding in the buy-out of stressed assets is done by the FPIs by way of buying security receipts (SR) in lieu of the bad loans being price tagged by ARCs, they are not permitted to acquire any NPAs directly from banks/NBFCs.
This model, in fact, limits competition and interest in NPA sales by banks, and probably results in lower recoveries for banks. The RBI Task Force on the Development of Secondary Market for Corporate Loans is of the opinion that there is an urgent need to address this dichotomy.
Only a handful of ARCs are active and have the necessary expertise and resources to engage in the market for acquisition and restructuring of NPAs. These ARCs dominate the market and they may have strong tie-ups with a few FPIs, and this arrangement perceivably restricts the entry of new investors.
In fact, the extant structure has the effect of forcing a “partnership” between an ARC and an FPI, even if the risk appetite and commercial objectives of these entities may vary distinctly.
“Such “veto” right of ARCs is creating a bottle-neck in the market, reducing transparency, competition and thereby prejudicing recoveries by lenders including public sector banks. Effectively an FPI, despite having extensive experience in NPA restructuring, can bid for NPAs through one of the few ARCs, leaving the number of bidders to stressed assets to such number of active ARCs in the market.
ARCs are required to invest 15 per cent acquisition price to ensure skin in the game, but capital availability is a constraint that acts as an impediment thereby restricting number of transactions in the market.
Even if majority of the capital (85 per cent) is invested by the FPIs, ARCs charge fees, which could have gone to Indian lenders as part of their recoveries.
The Task force is of the view that the concerns in the industry would be rectified if it is stipulated that FPIs can also acquire NPAs directly within permissible annual prudential limits defined by RBI in consultation with the Government of India.
At the same time, ARCs can be permitted to act as debt arrangers to help fill a void currently seen in the Indian market in this regard in respect of NPAs. “ARCs are in many ways perfectly placed to perform this role for NPAs,” the report observed.
However, presently they are not permitted to charge for this service. The RBI committee recommends that the ARCs be permitted to do this role and charge for the service.