 "ARCs witness sharp fall in asset acquisition, pricing remains a challenge")
After witnessing a surge in the first quarter of the current financial year, sale of bad loans to asset reconstruction companies (ARCs) declined in the second quarter. According to data by the Reserve Bank of India (RBI), sale to ARCs in the September quarter slumped to below Rs 40,000 crore from Rs 1.2-1.6 lakh crore in the June quarter.
In August this year, RBI had made significant changes in the norms for asset buying and selling to ensure the process was more stringent and transparent. The regulator had said the guidelines were revised to ensure ARCs have more “skin in the game.”
“The rationale behind these regulatory changes was to incentivise realisation and thereby expediting the process of recoveries/restructuring as NAV (net asset value) of SRs (security receipts) is calculated on the basis of the likely rate of recovery of stressed assets. With the regulatory changes effected in August 2014, ARCs will need to focus on actual redeeming of security receipts as it is no longer possible for them to base their profit model on the basis of management fees,” RBI said in its Financial Stability Report released on Monday.
They also need to mandatorily disclose the basis of valuations in case the acquisition value of assets is more than the book value. They will also have to disclose the details of the assets disposed of at substantial discount during a year, giving reasons for the same. The management fees being charged by the ARCs, which were earlier based on the net asset value (NAV) of the SRs, will now only be based on the outstanding value. The period for valuation of SRs and the planning period for reconstruction have also been shortened.
Given these changes, the sale of loans to ARCs in the next few quarters will continue to remain slow, experts said.
“In the near term, ARCs may find it difficult to align their pricing to the expectations of the selling banks and the selling banks also may not have yet reconciled to a realistic sale price expectation for the assets that they want to offload, resulting in the reduction in sales during the second quarter ended September 2014 ,” the report noted.
RBI believes the new norms will ensure a greater degree of transparency in the sector and will also be effective in controlling non-performing assets in the system.
In August this year, RBI had made significant changes in the norms for asset buying and selling to ensure the process was more stringent and transparent. The regulator had said the guidelines were revised to ensure ARCs have more “skin in the game.”
“The rationale behind these regulatory changes was to incentivise realisation and thereby expediting the process of recoveries/restructuring as NAV (net asset value) of SRs (security receipts) is calculated on the basis of the likely rate of recovery of stressed assets. With the regulatory changes effected in August 2014, ARCs will need to focus on actual redeeming of security receipts as it is no longer possible for them to base their profit model on the basis of management fees,” RBI said in its Financial Stability Report released on Monday.
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Now ARCs have to pay upfront 15 per cent of the bid value of non-performing loans, against five per cent earlier.
They also need to mandatorily disclose the basis of valuations in case the acquisition value of assets is more than the book value. They will also have to disclose the details of the assets disposed of at substantial discount during a year, giving reasons for the same. The management fees being charged by the ARCs, which were earlier based on the net asset value (NAV) of the SRs, will now only be based on the outstanding value. The period for valuation of SRs and the planning period for reconstruction have also been shortened.
Given these changes, the sale of loans to ARCs in the next few quarters will continue to remain slow, experts said.
“In the near term, ARCs may find it difficult to align their pricing to the expectations of the selling banks and the selling banks also may not have yet reconciled to a realistic sale price expectation for the assets that they want to offload, resulting in the reduction in sales during the second quarter ended September 2014 ,” the report noted.
RBI believes the new norms will ensure a greater degree of transparency in the sector and will also be effective in controlling non-performing assets in the system.