BackNew RBI guidelines to hurt earnings of asset reconstruction firms: Crisil
Ratings agency believes that these firms will find it challenging to align their pricing with the expectations of asset-selling banks
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Mumbai: Asset reconstruction companies (ARCs) are likely to see a slowdown in their assets under management (AUM) growth owing to new guidelines issued by the Reserve Bank of India (RBI), according to Crisil Ratings.
“Their (ARCs’) AUM have increased four-fold to ₹ 42,000 crore in the year to 30 June 2014. However, this growth is expected to moderate to 30% in the following 12 months," the ratings agency said on Thursday.
Crisil believes that in the near term, 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.
On Tuesday, RBI issued amendments to the guidelines for ARCs, stating that they will have to invest and hold at least 15% of the security receipts (SRs) issued by them while purchasing assets, as compared to 5% earlier.
However, the amendments will lead to better price discovery in the long term, while also improving the recovery prospects for ARCs, Crisil said in its statement.
The average age of non-performing assets (NPAs) being sold has fallen below two years as against around five years in the past—and will reduce further, the ratings agency observed. Crisil expects the average time taken to aggregate debt from various lenders can also come down to around 12 months from nearly 24 months earlier.
The central bank also revised guidelines on calculating management fees, effectively linking it to the net asset value (NAV) rather than the book value. These steps are likely to put some pressure on the earnings of ARCs, Crisil said.
“But recovery levels haven’t been up to the potential—the cumulative redemption ratio of SRs for the 10 years till June 2013 stands at 53%," Crisil pointed out in the statement.
The ratings agency believes that this track record will improve with the strengthened regulations and positive steps being taken by the industry.
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