RBI norms will hit asset reconstruction companies, says CRISIL

The Reserve Bank of India's (RBI) decision to ask asset reconstruction companies (ARCs) to triple their investments in security receipts would massively hurt the fledgling ARC sector, ratings agency CRISIL said here today.
"ARCs will find it challenging to align their pricing with the expectations of the asset-selling banks, given that the minimum investment requirement has been increased significantly," it said in a note issued a day after the central bank issued guidelines on ARCs.
CRISIL said that growth in ARCs' assets under management would fall massively due to RBI's directive.
There would only be a 30 per cent expansion in ARCs' books during the 12 months until June 2015, as against a four-fold increase to Rs 42,000 crore observed during the previous year, which was more than three times the previous year, CRISIL estimated.

Yesterday, the RBI had asked all 14 ARCs to invest a minimum of 15 per cent of security receipts as against the earlier 5 per cent, in norms aimed at strengthening the asset recovery sector.
However, the agency said that from a long-term perspective, these measures are good and would bolster price discovery.
"Amendments to regulations will also improve recovery prospects for ARCs. Membership of the joint lenders' forum, lower threshold for consent to enforce the SARFAESI Act, more time to conduct due diligence and greater disclosures will all enhance transparency and lead to better resolution of NPAs," CRISIL senior director Pawan Agrawal said.

He said that the ability of an ARC to raise capital would be a key differentiator and their earnings would also be under pressure since rules on management fees have been revised.