Money & Banking
Budget provision on ARCs won’t reduce bank NPAs
Many infrastructure loans are viable only at steep 50-70% haircuts. Banks are unwilling to take such a massive hit on profitability by selling down to ARCs, says a report. Hence, the budget provision of getting FDI into ARCs won’t work
 
In his third Budget, Finance Minister Arun Jaitley had announced 100% foreign direct investment (FDI) in asset reconstruction companies (ARCs) and similar foreign portfolio investment (FPI) in security receipts used in the transactions besides providing a better tax clarity. While these steps are long term positive for ARCs, it will not ease asset quality woes of banks sitting on a huge mountain of non-performing assets (NPAs), says a research note. 
 
In the report, Religare Capital Markets Ltd, says, "We met three large ARCs operating in India to assess the impact of regulatory changes proposed in the Union Budget. ARCs are unwilling to buy large loans given the concentration risk and uncertainty with respect to timing and extent of recovery. Differential valuations are also hurting sell-downs."
 
The budget proposes that sponsors be allowed to own 100% in ARCs as against 50% earlier. This will improve the credit rating of ARCs, in turn bringing down their cost of funds and enabling higher leverage. Also, foreign investors (mainly debt) will be allowed to own security receipts (SR) of ARCs, helping the latter diversify fund sources. "In all, the proposed changes (see table at right) are expected to address ARCs’ capital needs, but we believe the impact will be seen over the longer term. Thus, medium-term pain on the NPA front will continue for banks," the report says.
 
However, Religare Capital Markets feel that the capital constraints of ARCs are unlikely to ease in a hurry. It says, two key changes like allowing the sponsor own 100% in ARCs and allowing FPIs to own SRs, will need amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act where the support of opposition parties is critical. "As per our meetings, the combined net worth of all ARCs is about Rs3,500 crore and assets managed around Rs40,000 crore. Many conservative ARCs are operating at low leverage and do not wish to increase this," it says.
 
"Sponsor capital will only flow after changes to the SARFAESI Act," the report pointed out, adding, "ARCs do not have the scale to buy out lenders in large companies in steel and infrastructure. They argue that buying small stakes from one or two lenders will not help, as recovery or implementation of the restructuring package becomes difficult with a minority stake."
 
According to Religare Capital Markets, India’s ARC model is best suited for retail, small and medium-sized enterprises (SME) and mid-size corporates where legal issues are more manageable and the recovery amount and timeline largely predictable. In contrast, large corporates have complex legal issues and the timing or extent of recovery is uncertain. Most large companies have cross guarantees for group entities and unfunded exposures that are difficult to assess. Working capital funding for revival is also a problem given the large amounts involved, even as finding a suitable buyer (bank) for the debt post-turnaround may be hard. For ARCs, a delay in recovery by even a year can materially impact return ratios, it says.
 
 
There is a wide valuation differential for infrastructure loans and so far, there have been very few ARC deals in the infrastructure space where asset quality stress is the highest. Many infrastructure loans are standard or restructured (provision cover of 5%) in the books of banks. As these loans are viable only at steep 50-70% haircuts, banks are unwilling to take such a massive hit on profitability by selling down to ARCs.
 
Religare Capital Markets feels that the transition to without-recourse model a distant dream in India. It says, "ARCs are of the view that under the existing 15:85 structure, they can generate an ROE of 18-20% if they are able to recover 25-30% of the debt over and above the actual amount paid by them to banks. Valuation is a contentious issue for without-recourse (all-cash) buyouts. ARCs are willing to pay half the price for a cash deal as compared to 15:85 structures, whereas banks are reluctant to sell assets at very low valuations." 
 
While remain underweight on the sector, the reports states that corporate lenders are in its avoid list and it prefer playing the sector through private retail banks.

User

COMMENTS

Sunil Rebello

11 months ago

Budget provision on ARCs won’t reduce bank NPAs.
why should we pay more TAX?
ONLY CRIMINAL PROSECUTION OF WILLFUL DEFAULTERS WILL SOLVE THE PROBLEM.

vswami

11 months ago

To ADD;

Link to look-up:

http://www.thehindubusinessline.com/opin...

vswami

11 months ago

May you be Invited to look up :

https://vuukle.com/redirect.aspx?host=thehindubusinessline.com&uri=thehindubusinessline.com%2fopinion%2fthe-4-lakh-crore-bomb%2farticle8314670.ece (writer, a Rajya Sabha MP)

Among several suggestions as given vent therein, 'swayam' by a MP, the one that may deserve some in-depth consideration is as stated under: “There is also a need to create a public asset reconstruction company (ARC) which will allow banks to focus on lending, rather than recovery of stressed assets. Consolidation of bad loans can simplify resolutions. It has been seen that consortiums currently make things complicated. A public ARC made by political will and backing and with the support of the RBI can lead to faster resolution of NPAs.”

As underlined, however, "tax-payers are the ones left holding the NPA bill. Hence, a PSU clean-up is a matter of public concern."

With that in critical focus, as the problem itself pertains to mainly banks in public sector, how well the idea of creating another public sector entity i.e. a PARC will be kindly taken, or be largely acceptable, as a matter of prudence, also be gone ahead with against abundant caution, is a big daunting question; not so easy to be pressed forth, to find favour, with enough courage of conviction to be acted upon.

Of contextual relevance hence calling for a mention, at least in passing, is the, “3Rs”; which has correlation to elementary education, but having been neglected in formative years, that has boomeranged. The result is that newer and newer ideas, though not backed-up by any homework, worthy of any serious thought, have come to be floated around.

One such idea, it is noted, figures in the latest economic survey report; strangely, with one more ‘r’ added, it is styled as, - 4R solution, set of, - “recognition,recapitalisation, resolution and reform”. But there is no knowing whether those (4Rs), prima facie abstract concepts, have been adequately elaborated, with sufficient clarity, in order to easily follow, in an attempt to have anyone or more of those effected / implemented, to the end of a reasonably successful outcome.

PRAKASH D N

11 months ago

It is the experience of PSBs that ARCs is another area where public assets are sold for peanuts. Even though the NPA is backed by Assets like mortgage of property, the ARCs would not take unless you offer them a 60% to 80% discount of the upset price of the property. Here those corrupt officials at the top make a deal and sell it on the plea that today's Rs.2/- is better than tomorrow's Rs.10/-. It is only the private ARCs make profit at the cost of PSBs. If the PSBs can identify and lend money to the borrower, the onus of recovery should be on them. ARC is not a remedy for the problem of bulging NPAs.


D N PRAKASH
RETIRED BANK MANAGER

vswami

11 months ago

Response (in all humility,to share a poser (albeit not an answer anyway):

“....it will not ease asset quality woes of banks sitting on a huge mountain of non-performing assets (NPAs), says a research note. “

Having boldly ventured a guesstimate, with no painful time-consuming research of any kind needed, why not, instead of a ‘cut’, make it easy, with a clean shave of 100%; obviously, that should not matter much, for anyone concerned or unconcerned – will it ?

B. Yerram Raju

12 months ago

The skill sets of ARCs to recover better than the legatee institutions are no different. Second, legal provisions do not provide for any specific leverage for the ARCs. Ever since these institutions came into being they did not evoke greater confidence than the parents as the quality of underlying assets and their valuations are highly suspect. FDIs have their preferred routes for investment in a growing economy other than the assets that came under pressure due to government interference at the credit origination points.

SuchindranathAiyerS

12 months ago

To find buyers for proven non bankable assets assumes that there are as many junk bond buyers as salesmen, It is a matter of demand and supply. I am surprised that there are takers at 50 to 70% hair cuts. Surely the profligacy and corruption of the Indian State since sixty years would have seen the value of Bank Assets follow the same trajectory as the Rupee as a function of M-2 (Money with the Public and the Banking System)? This would mean an average of more than 80 to 90 per cent.

ASCI on WhatsApp: Consumers can now send snaps of objectionable ads
Spot a bad advertisement? Snap and WhatsApp to +91-77100 12345 and ASCI will take the necessary action
 
Bringing more ease to consumers, the Advertising Standard Council of India (ASCI) has introduced a new feature where complaint against any objectionable ad can be sent through WhatsApp. The number for sending such complaints on WhatsApp is +91-77100 12345.
 
"We are happy to launch the WhatsApp number, close to the World Consumer Rights Day on 15th March. ASCI is truly empowering consumers by making it more accessible. Today almost every person with a smartphone is using messaging services such as WhatsApp. Technology makes it possible for them to flag false, misleading or offensive ads instantaneously and anytime anywhere while on the go - be it while reading newspapers at home, on their way to office, listening to radio or watching TV in the evening," says Benoy Roychowdhury, Chairman of ASCI.
 
ASCI in a release said, WhatsApp will serve as only the first touch point for consumers to reach ASCI with their main objections and images of the objectionable advertisement. "Consumers can send pictures of print ads, hoardings, packaging or screen shots of websites, or links of YouTube videos. ASCI team would be scrutinising these complaints and take it further if found valid as well as having complete details such as name and e-mail ID. The complainant would receive status updates on the complaint by SMS and email. The WhatsApp number is not meant for commercial purpose. The complaint processing is free for consumers, in line with the ASCI's mission of promoting self-regulation of advertising content and protecting consumers' interest," it added.

User

Indian rocket with navigation satellite blasts off
Sriharikota (Andhra Pradesh) : An Indian rocket on Thursday evening blasted off successfully with the country's sixth navigation satellite called IRNSS-1F from the rocket port here.
 
The Polar Satellite Launch Vehicle (PSLV)-XL version standing 44.4 metres tall and weighing 320 tonnes tore into the evening sky at 4.01 p.m., breaking free of the earth's gravitational pull.
 
As the rocket went up, its engine roar reverberated over the media centre like a rolling thunder much to the thrill of the people here.
 
Named the Indian Regional Navigation Satellite System (IRNSS), the system consists of a constellation of seven satellites, of which five - IRNSS-1A, IRNSS-1B, IRNSS-1C, IRNSS-1D and IRNSS-1E - have already been put into orbit.
 
The sixth satellite -- IRNSS-1F weighing 1,425 kg -- is expected to join the other five soon.
 
Just over 20 minutes into the flight, the rocket would put into orbit IRNSS-1F at an altitude 488.9 km.
 
The satellite's life span is 12 years, an ISRO official said.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.

User

We are listening!

Solve the equation and enter in the Captcha field.
  Loading...
Close

To continue


Please
Sign Up or Sign In
with

Email
Close

To continue


Please
Sign Up or Sign In
with

Email

BUY NOW

The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)