Asset Reconstruction Companies’ Growth Plunges In FY19
There has been a sharp decline in the growth rate of assets under management of the dozen-odd asset reconstruction companies in FY19 driven down by higher discounts and rise in a redemptions, according to a report.
The AUMs of ARCs grew at 7 percent in FY19, as measured by security receipts outstanding, as against a 25 percent growth in the year-ago period, rating agency Crisil said in a report.
The report comes at a time when new non-performing assets recognition is slowing down and a lot of focus has shifted to resolution, where ARCs play an important role by buying assets from banks.
The agency attributed the slower AUM growth to higher discount rates and increase in SR redemption.
The agency said ARCs rated by it account for three-fourths of the market and the cumulative SR redemption ratio nearly doubled to 15 percent in FY19 from 8 percent the year before following the resolution of a few large stressed accounts and write-offs.
"With selling banks unwilling to invest more than 10 percent 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," Krishnan Sitaraman, a senior director at the agency, said.
In such a scenario, quicker recoveries by ARCs becomes even more critical as it helps free the capital deployed by them to make way for newer acquisitions and also attract new and repeat investors, he added.
There was a structural shift, with a substantial jump in the cash share of the acquisition cost, resulting in sizable investment by investor groups, apart from the selling institutions and ARCs, the report noted.
Cash as a portion of total acquisition cost for the fiscal 2019 was 90 percent, which is substantially higher from 28 percent in the previous fiscal, it said.
"ARCs have been able to rope in external investors to subscribe to SRs. In fact, in FY19, for Crisil-rated ARCs, foreign banks, stressed assets funds and global pension funds, had subscribed to as much as 60 percent of the total SRs issued," Subhasri Narayanan, a director at the agency, said.
Partnership model will be the way forward for ARCs given the higher capital requirement, it said, adding it can be through various routes ranging from investment in ARCs themselves to investment in SRs to direct investments in stressed assets.
Even as NPAs in the system are at a whopping Rs 9.4 trillion, ARCs' ability to tap this opportunity and grow sustainably will hinge on their ability to collaborate with other investors and accelerate their pace of recoveries, the agency said.