Asset Reconstruction Companies Of India
In December, 2002 when Parliament of India enacted Securitisation Act 2002 (THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT), 2002), it paved the way for asset reconstruction business India. Prior to enactment of the Securitisation Act, 2002, banks and financial institutions had no option but to enforce their security interests through the court process, which was extremely time consuming.
Asset Reconstruction Companies in India
After the implementation of the act many asset reconstruction companies (ARCs) were formed. The Asset Reconstruction Company of India Ltd (ARCIL) was the first one and pioneered building business of asset reconstruction in India. It was promoted by ICICI bank, IDBI bank, and SBI. Over past many years, ARCIL has launched NPAs resolution initiative through working with banking system and also launched subsidiary ARMS to handle retail NPA cases. Presently there are about fourteen Asset Reconstruction Company of India Ltd (ARCIL) in the country. Prominent among them are ARCIL, ASREC, India SME Asset Reconstruction Company Limited (ISARC),Pegasus Assets Reconstruction Pvt. Ltd., Reliance Asset Reconstruction Company Ltd, etc.
The Securitisation Act mainly provides for the following:
1) Enforcement of Security Interests by secured creditors;
2) Transfer of Non Performing Loans to asset reconstruction companies (ARCs), which can then take measures for recovery as prescribed under the Securitisation Act, 2002;
3) A legal framework for securitisation of assets.
Functioning of ARCs and a model flow of transaction in Asset reconstruction industry
The trust acquires NPAs from banks/FIs by formulating different trusts for the financial assets taken over. NPA are acquired from banks/FIs at fair value based on assessment of realisable amount and time to resolution. This of course at times goes through even bidding process. The maximum life of the trust as prescribed by the regulations is five years .The trust is set up as a pass through certificate (PTC) entity for Income tax purposes.
1) Accordingly, the trusts issues securities receipts (SR) to the investors which are usually Qualified Institutional Bodies (QIBs) or the seller bank itself. So in case the seller bank is itself buying the SR in the Trusts, its status changes from lender of the loan to that of investor in the SR. SR represent undivided right, title and interest in the trust fund. After acquiring the NPA, the trust becomes the legal owner and the security holders its immediate beneficiaries. The Securitisation Act prescribes that an ARC has to make a minimum of certain % investment in the trust.
2) The Trust redeems the investment to the SR holders out of the money realise from the borrowers. The Asset Reconstruction Company of India Ltd (ARCIL) facilitates the whole working.
The NPAs acquired are held in an asset specific or portfolio trust scheme. In the portfolio approach, due to the small size of the aggregate debt the ARC makes a portfolio of the loan assets from different banks and FIs. Whereas when the size of the aggregate debt of a bank/FI is large, the trust takes asset specific approach.
Advantages of Asset reconstruction Industry-
- As the cash realisation activity from defaulting borrowers is a lengthy and cumbersome procedure, relieving banks of the burden of NPAs enable banks to focus better on managing the core business including new business opportunities.
- The transfer help restore depositor and investor confidence by ensuring the lenders financial health. The banks use it as a method to hive off the bad loans from their balance sheet. ARCs are meant to maximise recovery value while minimizing costs.
- ARCs considered as expert in managing and handling NPA cases help in building industry expertise in loan resolution and restructuring management, besides serving as a catalyst for important legal reforms in bankruptcy procedures and loan collection.
- Asset Reconstruction Company of India Ltd (ARCIL)s play an important role in developing capital markets through secondary asset instruments.
Issues which concerns the industry
The Asset Reconstruction industry is in its nascent stage in India and there are many issues which concerns the industry. Prominent among them are-
3) NPA valuation- The valuation of NPA remains a concern with many parameters affecting its results. There is always a difference of opinion on recovery period, method of valuation (whether value as going concern or not), and data collection. Bridging valuation gap and creating confidence will be important for growth of the sector
4) Flexibility in controlling structure of an ARC- India has taken an approach with ARCs are either owned by the private parties or the bank (i.e. not by the government).But there is restrictions on a controlling stake by a single party and minimum investment in the Asset Reconstruction Company of India Ltd (ARCIL). A relaxation of this norm would encourage more private entities to have a presence in this sector bringing more depth to this sector. This will bring specialists into the game and the sector will be more competitive and transparent. There is also possibility create structure of handling retail NPA with lower capital requirement.
5) Reduction and standardization of registration fee and stamp duty- The duties should be rationalised and simplified to reduce the transaction cost and make the procedure smoother.
6) Life of trust set up by ARC for asset resolution-the maximum life prescribed by the law for trust is five years. There should be flexibility for extending the life of the trust if resolution is on-going or appears to be likely in the foreseeable future.
7) Lengthy recovery process-Lengthy legal procedures are known concerns those who are dealing with Indian laws. The regulator should frame some laws to speed up the recovery procedure to encourage more churning in the sector.
8) Accounting policies- As this sector is relatively new in India; the accounting treatment of important issues differs from company to company. ICAI should come forward and should prescribe some guidance which will bring comparability and transparency to this sector.
The growth of Asset reconstruction sector is important for the Indian Economy. Some kind of fiscal incentives should be provided to fuel the growth of the industry. Also as total NPA in the Indian banks is reducing the ARCs should look forward towards other avenues of business like, business turnaround management and debt restructuring. There should be mechanism to review to working of ARC which should work upon increasing the transparency in the sector. As more and more private players enter into this sector, this space is really exciting and can become multi billion dollar business in itself. Considering the current size of NPA Rs. 1725 billion, the problem is big and require focussed approach to solve.
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