RBI norms on ARCs to reduce funding needs, says Crisil

18 Oct , 2022 By : Monika Singh

The structural changes issued by the Reserve Bank of India’s (RBI) norms regarding the asset reconstruction companies (ARC) will result into lower funding requirement, along with improved governance and better disclosures by such entities, ratings agency Crisil Ratings said in a report. The minimum investment requirement for the ARCs is likely to come down by over 80% in some scenarios according to the agency.

As per the new norms, ARCs have to invest a minimum 15% in security receipts, compared to the transferor’s investment, or 2.5% of the total receipts issued, whichever is higher. Earlier, ARCs had to invest at least 15% of the receipts even if there were other investors present.

“The revision in the minimum investment in security receipts is a significant benefit for ARCs. This will free up their funds and support growth over the medium term,” Subha Sri Narayanan, director at the agency, said.

Along with lower funding requirement for acquisitions, the agency also sees the option available to the ARCs to participate as a resolution applicant under the Insolvency and Bankruptcy Code (IBC) as a positive. The step will open up new revenue stream for ARCs. However, to be a resolution applicant, ARCs will need net owned funds of more than Rs 1,000 crore, which only a few entities may be able to raise. Excluding National Asset Reconstruction Company, (NARCL) less than five ARCs meet that criteria as on March 31, 2022.

Additionally, the resolution process is likely to fasten due to guidelines such as charging management fees only from recovery of underlying assets and requiring to retain a rating from a credit rating agency for at least three years, Crisil said.

However, the norms also require ARCs to increase net owned funds to Rs 300 crore from `100 crore in by March 2026, which could be challenging for some of the smaller ones, according to the agency.

“More than half of the ARCs have net-owned funds lower than the increased requirement of `300 crore. A number of them may not be able to bring in additional capital. Therefore, over time, these developments could lead to consolidation in the industry,” Gautam Shahi, director at Crisil, said.