ARCs IN INDIA
A well-functioning banking system is the backbone of India’s financial and economic landscape. The system relies on the proper functioning and links between borrowers and lenders. But when borrowers cannot honor their debt, it leads to an increase in stressed assets, non-performing assets (NPAs) and non-performing loans (NPLs) in the system. This results in a decline in the profitability of banks, and also affects India’s economic performance. ARCs like ACRE buy, resolve and turn around assets denominated in ? from distressed to standard state. They thus help unlock the hidden potential of these assets, and play a critical role in driving the country’s economic engine.
01. Set up under the SARFAESI Act 2002
02.Regulated and licensed by Reserve Bank of India (RBI)
03. Provide a platform for sourcing, aggregation and turnaround of stressed assets
04.Act as the interface between lenders (NPA pool) and prospective investors (domestic and foreign capital)
05.Enable banks to focus on core banking operations instead of dealing with sticky assets
06.Acquire and manage stressed assets funded by external investors with stipulated minimum co-investment by ARC
EVOLUTION OF ARCS IN INDIA
Agency to Asset Management Company (AMC)
Then: Economically acted as agents of banks
Now: Act primarily as AMC (15% co-investor) for prospective investors
Growth in Credit
Underwriting
Given the investment requirement by ARC’s there is a necessary requirement for strong underwriting
Value Generated by
ARC Skillsets
Value from NPAs is, generated by the strength of the platform, the uniqueness of its client franchise, ARC capabilities, and its robust business model
Building Operational
Efficiencies
ARCs are now required to build operational efficiencies to actively manage and turn around distressed assets.
ARC REGULATORY OVERVIEW
-
RBI regulations
- Periodical (annual/quarterly) reporting to RBI
- Board appointments to be approved by RBI
- Audit and inspection of RBI carried out on regular intervals
-
Capitalization
- Minimum Net Owned Funds (NOF) requirement of INR 300 Cr by Mar-2026 by way of a glide path
- Minimum capital adequacy of 15%
-
Businesses
- Minimum 15% of transferor’s investment in SRs or 2.5% of total SRs issued, whichever is higher
- Restriction on businesses that it can undertake
-
Accounting Tax
- Account norms prescribed by RBI
- Evolved rules around taxation
NPA MARKET IN INDIA
Source: RBI Financial Stability Report & Report on Trend & Progress of Banking in India
Gross Stressed
Assets with
Banks (INR Lakh Cr)
Source: RBI Financial Stability Report & Report on Trend & Progress of Banking in India
Net NPA in
India (INR Lakh Cr)
Source: RBI Financial Stability Report & Report on Trend & Progress of Banking in India
KEY OBSERVATIONS
01. Banks have stressed assets of INR 7.5 Lakh Cr as of Mar-23 thereby providing a large opportunity for distressed asset players in India.
02. Provision Coverage Ratio (PCR) of banks as of Mar-23 was ~74%
03. NBFCs have additional stressed assets of ~INR 1.6 Lakh Cr as of Mar-23; PCR as of Mar-23 was ~65%.
IMPORTANT GUIDELINES
Master Circular Reserve Bank of India
LEGISLATIONS & ENACTMENTS
