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April 12,2017 location Mumbai

Tighter ARC regulations to spawn consolidation: CRISIL

Bigger players resilient to evolving regulatory environment

CRISIL believes the Reserve Bank of India’s (RBI) recent proposal to increase net owned funds to Rs 100 crore(from Rs 2 crore) for asset reconstruction companies (ARCs) is among the series of steps taken to strengthen the ecosystem that will attract players with deep pockets, enhance transparency in transactions, improve recoveries and open up scope for consolidation.

Given the thicket of rule changes, larger ARCs would be on a firmer footing, especially those backed by strong promoter groups with the ability and intent to infuse capital. Given the thicket of rule changes, larger ARCs would be on a firmer footing, especially those backed by strong promoter groups with the ability and intent to infuse capital, and relatively better capability to attract capital from external sources, given that 100% foreign direct investment is permitted in the sector.

The ability and intent of promoters and investors in smaller ARCs to infuse capital will be monitorable and would potentially be a catalyst of consolidation.

Of the 23 ARCs in India, six are comfortable in terms of the revised net owned fund's requirement and other stringent regulations. However, ARCs that struggle to infuse capital or raise external funding, and are short on specialist manpower will get marginalised further.

Says Krishnan Sitaraman, Senior Director, CRISIL Ratings: “The top five players account for ~90% of total assets under management. With regulations tightening, we believe their market share will consolidate further and smaller ARCs may merge with larger rivals, or they could become takeover targets for large private equity investors and stressed asset funds wishing to enter the business”.

With effect from April 1, 2017, the RBI has increased the provisioning requirement for banks investing more than 50% of the value of stressed assets ( the limit subsequently to be reduced to 10% from fiscal April 1, 2018) sold by them in the security receipts (SR) issued in lieu. The regulator intends to ensure that any NPA sale is a true sale conducted through a transparent process where the ARC ends up with significant skin in the game so as to maximise recoveries.

Implementation of bankruptcy framework and engagement with independent credit assessment firms could aid resolutions of stressed assets. The strengthening of the framework would affect the volume of asset sales as banks are reluctant to take adequate haircuts. However, it will lead to the more cash-based sale of stressed assets, which, in turn, would necessitate higher capital. That would benefit the larger ARCs.

Asset sales spiked in the fourth quarter of fiscal 2017 before the new provisioning norm kicked in. CRISIL estimates that Rs ~ 21,000 crores of stressed assets were sold in this period and that the total outstanding assets under management with ARCs as on March 31, 2017, was Rs ~ 75,000 crore.


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