Many ARCs within striking distance of RBI’s revised NOF norm, say experts
Most of the asset reconstruction companies (ARCs), barring two or three, will be able to meet the minimum net owned fund (NOF) norm of ₹200 crore by the March-end 2024 deadline, say industry experts.
Many ARCs are within striking distance of the minimum NOF target of ₹200 crore, having reached ₹175-180 crore by December-end 2023 due to improvement in recovery rate from security receipts (SRs)
Currently, there are 27 ARCs in India. For ARCs that existed as on October 11, 2022 (when the minimum NOF prescription was ₹100 crore), a glide path has been prescribed for achieving the minimum NOF target of ₹200 crore by March-end 2024 and ₹300 crore by March-end 2026.
- Also read: ARC ecosystem likely to see consolidation due to higher minimum NOF requirement: Crisil Ratings
ARCs that obtained certificate of registration on or after October 11, 2022 have to maintain minimum NOF of ₹300 crore on an ongoing basis.
NOF consists of paid-up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets.
Below NOF threshold
Tanvi Fifadra, Team Leader, Crisil Ratings, in a recent report, noted that of the 27 ARCs, 10 are below the required NOF threshold as per reported financials for fiscal 2023.
“Only a few will be able to raise funds and many small ARCs will find it difficult to reach the threshold by March 31, 2024, impacting continuity of their operations and triggering consolidation. Hence, we foresee big ARCs grabbing larger chunks of stressed assets,” she said.
However, ARC industry insiders say ARCs’ financials as of December-end 2023 present a different picture, with many closing in on the NOF target.
Out of the 29 ARCs that existed when RBI revised upwards the minimum NOF norm in October 2022, two ARCs – Lone Star India Asset Reconstruction Pvt Ltd and Arcion Revitalisation Pvt Ltd — have surrendered their licences.
Crisil Ratings has painted an optimistic picture for the recovery rate of security receipts (SRs) for ARCs. The rating agency expects the recovery rate of SRs to improve 500-700 basis points (bps) on-year to 55-60 per cent next fiscal.
This will be driven by a bigger share of cash-based transactions, greater exposure to retail loans and faster recovery in recent acquisitions due to lower vintage and better-quality assets.
RBI report
According to a 2021 RBI report on ARCs, preference given to ARCs by banks is largely on account of three fundamental needs that ARCs are able to fulfil. First, ARCs allow banks/ FIs to focus on their core function of lending by removing the sticky stressed assets from their books and thereby freeing up their capital and management for productive use.
Second, where lenders invest in security receipts (SRs), ARCs make recovery for lenders by acting as the manager of the stressed assets. Third, ARCs can help the borrowers in reviving their businesses.
The report underscored that revival of businesses is a significant need both for protecting the viable and productive assets of the economy and for ensuring better return to lenders from their stressed assets.
ARCs’ assets under management are expected to increase to ₹1.50-lakh crore by March-end 2024 from ₹1.38-lakh crore as on March-end 2023, per a joint Assocham-Crisil report.