With a slew of amendments in the securitisation law and a rise in the cap on foreign direct investment (FDI) at the end of last year, asset reconstruction companies (ARCs) can expect better business this year.
The revision in the FDI ceiling and the rise in the sub-limit on investment by foreign institutional investors (FIIs) in securities receipts would boost fund raising from international investors.
ARCs have often been criticised for allegedly selling assets such as real estate, rather than carrying out reconstruction. The reforms in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act would help in resolving cases faster. ARCs would also be allowed to convert part of the debt into equity.
ARCs, however, are apprehensive on immediate gains. They say a change in the business scenario depends a lot on the stance of banks on pricing and their tendency to hold on to bad loans. Also, institutional investors would take a closer look at the track record of ARCs before committing substantial funds.
Birendra Kumar, managing director and chief executive, International Asset Reconstruction Company, said fund raising would be easier. Also, the market for securities receipts is expected to revive.
Currently, most sales of non-performing assets involve payments in cash, rather than issuance of receipts. This scenario may change soon, owing to the liberalisation of the ceiling on individual FII investment from 10 per cent to 74 per cent.
While the twin changes would help improve the situation, ARCs have to live with the challenges of the kind of assets and the price at which these are put on the block by lenders, Kumar said.
There are challenges to the resolution of the problem of non-performing assets, owing to a host of factors, including legal ones. Banks had to bring early-stage non-performing assets, for which there were chances of revival, said the head of an ARC.
The need to raise capital to meet Basel-III norms and tackle the growing burden of provisions may drive banks to change their approach to asset sales, said a senior executive at a public sector bank.
