ARCs need to up their game on recoveries
In case of SME defaults, of every ₹ 100 worth of bad assets bought at a price of about ₹ 65, ARCs could recover only ₹ 11 in the first four years of acquiring them
Asset reconstruction companies (ARCs), set up specifically for recovering funds from bad assets, have a dismal track record of squeezing monies out of errant borrowers. That they may have become overenthusiastic, despite this, has also become apparent now.
A report from the Indian arm of global rating agency Fitch Ratings shows that ARCs in India paid a high price to acquire dud assets from banks during 2006-2017, but recovery rates continued to be an embarrassment.
India Ratings and Research Pvt. Ltd quoted data from the Reserve Bank of India and showed that ARCs acquired bad assets at an average discount price of 64% to the principal outstanding in 2017, much lower than the discount of 70% in 2015.
If we break this down to recoveries from large corporates, small businesses and retail loans, ARCs got back the least from large borrowers, with just about an average 52% of principal outstanding recovered over the last 10 years. But they paid a higher price to acquire bad assets of large borrowers despite having low recoveries.
In case of defaulters in SME (small and medium enterprise) borrowers, of every ₹ 100 worth of bad assets bought at a price of about ₹ 65, ARCs could recover only ₹ 11 in the first four years of acquiring them.
Of every ₹ 100 worth of bad assets bought, ARCs couldn’t recover more than ₹ 9 in the case of large defaulters.
The success of an ARC is how fast it recovers the maximum from a defaulter. The fact that ARCs could recover abysmally low in the first four years shows their failure.
Analysts at the rating agency believe that with the bankruptcy code becoming operational, ARCs will remain key recovery agents only for SME and retail defaults. “Those with big sponsor support will still be able to actively engage in managing mid-size assets and select large corporate assets based on their management band-width and recovery expertise,” said Arijeet Maji, senior analyst at India Ratings and Research.
Funds remain the biggest constraint and ARCs will need a huge dose of capital if they want to be a significant participant in any turnaround of large defaulters. To get this capital, they badly need to improve their recovery performance.
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