Tighter capital norms to spawn consolidation among ARCs: Report

12 Apr 2017

The recent tightening of ARCs' capital requirements will lead to consolidation in the industry and that bigger players stand to benefit from the move, says a report.
The Reserve Bank last week increased the net-owned funds for asset reconstruction companies (ARCs) to Rs 100 crore from a meagre Rs 2 crore. Last April it had increased the upfront payment requirement to 15 per cent of the asset value from 5 per cent.
Crisil believes these are among a series of steps taken by RBI to strengthen the ARC ecosystem that will attract players with deep pockets, enhance transparency in asset sales, improve recoveries and open up scope for consolidation.
Given the thicket of rule changes, larger ARCs will be on a firmer footing, especially those backed by strong promoter groups with the ability and intent to infuse capital, and relatively better capability to attract capital from external sources as 100 per cent foreign direct investment is permitted in the sector, says the report.
The ability and intent of promoters and investors in smaller ARCs to infuse capital will be a monitorable and would potentially be a catalyst of consolidation.
According to Crisil, of the 23 ARCs, six are comfortable in terms of the revised net-owned funds requirement and other stringent norms. But those struggling to infuse capital or raise external funds and lacking in specialist manpower will get marginalised further.
"The top five players (Edelweis, JM Financial, Arcil, Kotak etc) account for around 90 per cent of total assets under management. With tighter regulations, we believe their market share will consolidate further and smaller ones may merge with larger rivals, or they could become takeover targets for large private equity investors and stressed asset funds wishing to enter the business," the report said.
It can be noted that from April 1, 2017, the RBI has increased the provisioning requirement for banks investing over 50 per cent of the value of stressed assets (the limit subsequently to be reduced to 10 per cent from April 2018) sold by them in the security receipts issued in lieu.