Rating agency Fitch has downgraded Asset Reconstruction Company India Ltd's (ARCIL) national long-term rating to ‘A (Ind)’ from ‘A+ (Ind)’. The outlook for the rating is negative.
The rating cut reflects the evolving regulatory environment for the asset reconstruction industry, in which ARCIL is the largest operator, Fitch said.
Increased regulatory oversight has contributed to revision of financial statements and has emphasised the need for tighter internal processes and controls. This highlights the evolving nature of the industry, both from an accounting, as well as a regulatory perspective.
Recent changes significantly reduced the sector’s profitability. Potential changes in accounting policies would also add to the volatility in earnings.
Notwithstanding the recent accounting changes, ARCIL’s fundamentals remain intact. The company is well capitalised, has very low leverage and an established recovery track record.
The negative outlook reflects the uncertainty on account of management fees and expense reimbursements, and their influence on the business model and future prospects.
Fitch said greater volatility in earnings may lead to shareholders or creditors reviewing the company's position. ARCIL has had very modest debt and an increase in leverage beyond historical levels would also be a credit negative.
Besides changes in accounting, a recent review of ARCIL by the Reserve Bank of India reportedly highlighted some corporate governance concerns. Given the nature of the business and its role in the banking system, a close relationship would continue to exist between ARCIL and commercial banks, its main shareholders, Fitch said.
