Asset Reconstruction Companies (ARCs) have requested banks’ to consider their demand for funds favourably and come up with a credit product tailored for them based on the underlying distressed assets as represented by security receipts (SRs).

Currently, bankers are lukewarm to credit proposals from ARCs, citing a lack of regulatory clarity, even as the Reserve Bank of India (RBI) has given them a free hand to take a commercial decision in this regard, say ARC industry executives.

They emphasised that the RBI’s circular only prohibits a lender to an ARC from selling its non-performing assets (NPAs) to the same ARC on a bilateral basis.

• Also read: Transfer of stressed assets to ARCs: Lenders to widely disseminate information and give access to checklist

Further, the sale of NPAs has to be done only through public auctions to ensure that transactions are based on the arm’s length principle.

In the backdrop of the RBI circular, industry experts opined that the amount of funding to an ARC could be based on the criteria of net worth, track record of performance, credit rating, and repayment history.

‘Scope for enhancement’

“According to the in-house data available, bank borrowings constitute only a fifth of the total borrowings of ARCs and represent a small portion of the equity component. There is scope for enhancement of bank loan limits to ARCs to retire high-cost market borrowings to reduce the cost of capital given the track record of repayment of ARCs.

“The reduced cost of capital of ARCs will help them quote a better price for banks’ assets on sale and help banks ultimately,” said Hari Hara Mishra, CEO, Association of ARCs in India.

The sale of stressed assets to ARCs is one of the channels for their resolution for lenders. This is done either through a combination of cash payments and the issue of security receipts (SRs) or all cash transaction.

• Also read: Shriram group to enter ARC and wealth management business

Credit flow

The Chief of an ARC observed that credit flow to the ARCs is on a decline as loans get repaid from recovery from underlying assets and no fresh credit lines are sanctioned.

Moreover, there is hesitation among bankers to extend fresh loans to ARCs, even though most ARC acquisitions are backed by adequate collateral and visible cash flow after resolutions are put in place, and realistic pricing of assets.

The ARC chief underscored that very few banks have a customised loan product for ARCs, and as such, the flow of loans to the ARC sector is very insignificant.

According to the RBI’s ‘Committee to Review the Working of ARCs’, these companies allow banks/ financial institutions to focus on their core function of lending by removing sticky, stressed assets from their books, thereby freeing up capital and management for productive use. Where lenders invest in SRs, ARCs make recovery for lenders by acting as the managers of the stressed assets. ARCs can help the borrowers revive their businesses.