Domestic ratings agency India Ratings today said there is a need to infuse more capital into the asset reconstruction companies (ARCs) to help tide over the bad loans problem.
"ARCs play a crucial role in the financial sector and help banks clean up stress loans, which is the need of the hour. Banks are turning to ARCs but capital remains a key challenge for the industry," it said in a note.
At present, the higher requirement of investment in security receipts at 15 per cent and the cap of 50 per cent for shareholding of sponsors, are impacting the capital positions at ARCs, it said.
The note from the rating agency comes days after Reserve Bank Governor Raghuram Rajan also touched upon concerns surrounding the ARCs and supported the need for adding capital to them.
"On ARCs, I am very much for adding capital to them," Rajan had said, hinting that the RBI is keen to amend a clause that restricts a promoter's ownership in ARCs, which generally takes over distressed assets from bank and creates value by turning around the asset.
Rajan added that global private equity funds like KKR, that has already announced an investment into an Indian ARC, which possess the risk appetite and the professional management, would be keen to enter the fray as bad assets pile up in the system.
India Ratings today said the stressed loans in the system, including restructured advances and non-performing assets, are at 11.1 per cent of the outstanding credit of Rs 65.25 trillion.
Given their current capital level of Rs 40 billion, ARCs can purchase only up to 17 per cent of the stressed assets in the system, it said.
