SIDBI looking to exit its ARC business, once again

Mumbai: Small Industries Development Bank of India (SIDBI) is actively looking at a second attempt to exit from its subsidiary India SME Asset Reconstruction Company (ISARC). In an interview with Mint, SIDBI Chairman S Ramann said the ARC had earlier sent a proposal to the central bank which was declined as the buyer failed to meet the increased provision of higher networth.

"We need to exit the ARC business. It doesn't make sense for a public sector enterprise to be in business. You need to have a private sector entity to be a part of this, whose decisions are not questioned," said Ramann.

"We need to exit the ARC business as the risk taking in the business is very high. This is better handled by a stressed fund or private sector entity where risk decisions are not questioned," said Ramann

In 2022, Press Trust of India reported that Union bank of India had sold its 8% stake in ISARC in favour of Dhansamridhi Finance. Other sponsors of the ARC include Bank of Baroda, Punjab National Bank, and SIDBI Venture Capital Ltd.

The ARC sector in India has seen a churn with large players like Blackstone looking to sell their controlling interest in the ARC business. Arcion Revitalization, originally promoted by Apollo Global and ICICI bank, gave up its licence last year. Earlier, Lonestar surrendered its ARC licence and KKR abandoned plans to establish an ARC.

Stringent capital requirements have made it difficult for ARCs to function. The Reserve Bank of India had increased the capital requirement for ARCs to ₹100 crore from ₹2 crore. This, too, has been raised to ₹300 crore by 2026.

Ramann said SIDBI is currently focussed on increased direct lending to the micro, small and medium enterprises (MSMEs) by eyeing a 25% share in the banking system's total lending. SIDBI's current share in bank lending stands at 17%.

Earlier, the development finance institution had been in preliminary discussion with both the RBI and the government over plans to convert itself into an SME digital bank. But the talks didn't make much headway.

“The future is about focussed digi-bank. SIDBI has a better risk assessment and underwriting. We are looking at going more digital, said Raman.

SIDBI is also looking to raise capital through a rights issue of ₹10,000 crore in the next financial year to expand its equity capital as it expects to grow its assets to ₹5 trillion by March 2024 from about ₹4 trillion in March 2023.

Sidbi's capital adequacy ratio came down to 19.29% in FY23 from 24.28% in FY22, according to its annual report.