Mumbai: Assets under management of asset reconstruction companies (ARCs) has grown 7% year-on-year, crossing the ₹1 lakh-crore-mark (as measured by security receipts) at the end of FY19. While the value of debt acquired remained around ₹40,000 crore, AUM growth slowed because of higher discount rate and increase in security receipt (SR) redemptions, a study from Crisil showed.
Over this period, regulatory changes, aimed at increasing ARCs’ skin in the game and diversifying the potential investor base for stressed assets, have increased the capital intensity of the ARC business model. In August 2014, the minimum investment requirement by ARCs for assets acquired was increased from 5% to 15%. Norms for investment in ARCs as well as SRs, including for foreign investors, were eased subsequently. But the real push came when the provisioning norms for the selling banks were changed, wherein their investments in SRs over 50% led to higher provisioning requirement by banks. This limit is currently 10%.
“With selling banks unwilling to invest more than 10% in most cases, the business model for ARCs has become more capital intensive, with a need to either put in their own funds, or bring in other investors. In such a scenario, quicker recoveries by ARCs become even more critical as it help in freeing the capital deployed by them to make way for newer acquisitions and also attract new and repeat investors," Krishnan Sitaraman, senior director, Crisil Ratings, said in a press note.
More importantly, the year saw a structural shift, with a substantial jump in the cash share of the acquisition cost, resulting in a sizeable investment by investor groups, apart from selling institutions and ARCs. Cash as a portion of the total acquisition cost for 2018-19 was roughly 90%, a substantial pick up from 28% last financial year, the Crisil report said.