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New norms will temper ARC growth
New norms will temper ARC growth
New norms will temper ARC growth
New norms will temper ARC growth
New norms will temper ARC growth
New norms will temper ARC growth
New norms will temper ARC growth
New norms will temper ARC growth
New norms will temper ARC growth
New norms will temper ARC growth
New norms will temper ARC growth
New norms will temper ARC growth
New norms will temper ARC growth
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New norms will temper ARC growth

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New Reserve Bank of India (RBI) norms will temper growth of Asset Reconstruction Companies (ARCs), but will improve price-discovery and recovery prospects – A CRISIL Ratings presentation

New Reserve Bank of India (RBI) norms will temper growth of Asset Reconstruction Companies (ARCs), but will improve price-discovery and recovery prospects – A CRISIL Ratings presentation

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  • 1. ForInternalUseOnly–NotForExternalDistribution©2014CRISILLtd.Allrightsreserved. New norms will temper ARC growth But they will improve price-discovery and recovery prospects Pawan Agrawal Senior Director – CRISIL Ratings Rajat Bahl Director – CRISIL Ratings August 7, 2014 1
  • 2. ForInternalUseOnly–NotForExternalDistribution©2014CRISILLtd.Allrightsreserved. Key messages  Growth will settle at a lower level for ARC industry – AUM reached Rs.42,000 crore by June 2014, a 4 times increase in a year – Growth to moderate to 30 per cent in the current year, given the recent regulations  Capital and earnings will emerge as challenges – Recent regulatory changes significantly increase the capital requirements of ARCs – ARCs that can raise capital in a timely manner will be better positioned  Track record of asset resolution critical for long term sustainability of ARCs – ARCs have successfully reconstructed several large accounts – However, experience shows that the recovery till date has not been up to potential – Cumulative redemption ratio* till June 2013 stood at 53 per cent  Better recovery prospects ahead – Lower vintage and quicker debt aggregation to be the key drivers  Recent regulations structurally positive for the sector * Redemption ratio = SRs redeemed / SRs issued; Source: RBI 2
  • 3. ForInternalUseOnly–NotForExternalDistribution©2014CRISILLtd.Allrightsreserved. Trend in Assets Under Management (AUM; SRs outstanding) Growth will settle at a lower level for ARC industry  Regulatory support coupled with high level of NPAs fuelled recent growth – Shortfall on sale of assets permitted to be booked over 2 years for banks – Upfront booking of profit on sale of assets to ARCs permitted for banks  Industry will need to adjust to the minimum 15 per cent requirement now – Aligning pricing strategy with expectation of selling banks will be challenging in the near term – Proportion of cash deals is likely to go up Source: RBI, CRISIL estimates 3 8,800 42,000 55,000 - 10,000 20,000 30,000 40,000 50,000 60,000 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 E Jun-15 P Rs.Crore
  • 4. ForInternalUseOnly–NotForExternalDistribution©2014CRISILLtd.Allrightsreserved. Capital and earnings will emerge as challenges  Given the nature of assets, ARC business has traditionally been equity- funded  Aggregate net worth is modest at ~Rs.2,500 crore as on June 30, 2014 – Gearing has increased to 1x as on June 2014 from 0.1x as on June 2013 – Gearing philosophy varies significantly among ARCs  Capital raising will emerge as a significant challenge – Earnings will come under pressure due to revision in management fees norms – Regulatory restrictions on sponsor shareholding and listing can act as a constraint… – …may be partly offset by higher regulatory limit for FDI and FII investment in ARCs – Could result in lower growth or higher gearing  Ability to raise capital in a timely manner will become a differentiator Source: CRISIL estimates 4
  • 5. ForInternalUseOnly–NotForExternalDistribution©2014CRISILLtd.Allrightsreserved.  Reconstruction has been used as preferred strategy for large accounts* – Reconstruction includes restructuring and sale of business strategies ARCs have successfully reconstructed several large accounts Re-construction 77% Sale of assets/ Settlement 23% * Large accounts = principal debt of over Rs.100 crores 5  Timely debt aggregation by ARCs  Unprecedented increase in land prices – promoters have more skin in the game  Delay/inability in aggregating debt  High vintage of NPAs  Prolonged litigations What has worked well? What has not worked?  Several success stories over the past decade – Company 1 (redemption ratio of 85%) – Company 2 (80-90%) – Company 3 (90-100%) – Company 4 (90-100%) – Company 5 (60-70%)
  • 6. ForInternalUseOnly–NotForExternalDistribution©2014CRISILLtd.Allrightsreserved. Sale of assets drive recoveries from small accounts  Sale of assets has been used as preferred strategy for small accounts* – Includes settlement with promoters as well  Redemption ratio is better at ~63% # Principal debt of below Rs.100 crore Re-construction 21% Sale of assets/ Settlement 79% 6  Relatively higher asset coverage offers better cushion  Quicker implementation of resolution strategies being sole lender  Promoters’ ability to bring in funds also played an important role  Poor availability of documentation related to security creation  High vintage of NPA What has worked well? What has not worked?
  • 7. ForInternalUseOnly–NotForExternalDistribution©2014CRISILLtd.Allrightsreserved. Trend in Industry Redemption Ratio Overall recovery has not been up to the potential  Cumulative redemption ratio till June 2013 stood at 53 per cent Source: RBI 9% 32% 53% 0% 10% 20% 30% 40% 50% 60% - 2,000 4,000 6,000 8,000 10,000 12,000 Jun-05 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 RedemptionRatio(%) Rs.Crore Aggregate Redemption (LHS) Redemption Ratio (RHS) 7
  • 8. ForInternalUseOnly–NotForExternalDistribution©2014CRISILLtd.Allrightsreserved. Outlook: Better recovery prospects ahead  Recent regulatory changes will improve quality of debt acquired… – Early formation of, and participation at, Joint Lenders’ Forum is a significant positive step – Lower threshold (60%) for consent to enforce SARFAESI to speed up debt aggregation  …due to vintage of NPAs coming down – The vintage has come down to < 2 years for recent sales, from ~5 years earlier – Recent sale of NPAs of a shipyard and a hotel company are testimony  …and quicker debt aggregation – A key enabler for faster resolution – The average time taken for debt aggregation was ~2 years in the past  ARCs are arranging additional funding for revival; expedites resolution – Examples: A textile company and a mid sized Bangalore based residential developer  Implementation of learnings from past experience to help ARCs  Regulatory attention should now be focused towards quicker legal process – Will need to address the challenge of prolonged litigation 8
  • 9. ForInternalUseOnly–NotForExternalDistribution©2014CRISILLtd.Allrightsreserved. Recent regulations structurally positive for the sector 9 Regulations Impact Increase in minimum investment requirement in SRs to 15%, from 5%  Will lead to higher capital requirement for ARCs  Will significantly impact growth  ARCs to have more skin in the game – will drive better recovery in the long term  Will lead to efficient price discovery in long term Management fees to be calculated on NAV rather than acquisition value  Will have negative impact on earnings  Will incentivise ARCs to recover more ARCs to be member of JLFs  Will quicken the process of NPA sale  Good for NPA resolution in long term More time for due diligence to ARCs  Will enhance robustness of due diligence process Requirement of rating in six months  Quicker fair value assessment for banks Greater disclosures  Will increase transparency
  • 10. ForInternalUseOnly–NotForExternalDistribution©2014CRISILLtd.Allrightsreserved. CRISIL Limited www.crisil.com LinkedIn YouTube FacebookStay Connected | | | |Twitter 10
  • 11. ForInternalUseOnly–NotForExternalDistribution©2014CRISILLtd.Allrightsreserved. Primer on ARCs and CRISIL’s experience in the sector 11
  • 12. ForInternalUseOnly–NotForExternalDistribution©2014CRISILLtd.Allrightsreserved. CRISIL’s wide coverage provides a 360° view of the ARC industry Ratings of bank loans Ratings of banks Ratings of ARCs Recovery risk rating of SRs issued by ARCs Rated more than 13,000 firms Rated ~50 banks Rated 5 ARCs Rated SRs ~Rs.12,000 cr Loans NPAs Recovery Redemption proceeds 12
  • 13. ForInternalUseOnly–NotForExternalDistribution©2014CRISILLtd.Allrightsreserved. What are Asset Reconstruction Companies?  Specialised institutions to deal with NPAs in India; regulated by RBI  Play an important role of putting back the assets for productive use  Industry is in nascent stage even with more than 10 year history  Arcil was set up as first ARC in 2002; currently 14 ARCs operational in India  ARCs set up a trust which issues Security Receipts (SRs)  Key industry statistics (as on June 30, 2014*) – Principal debt acquired: ~Rs.90,000 crore – SRs issued: ~Rs.54,600 crore – SRs redeemed: ~Rs.12,600 crore – SRs outstanding (Assets Under Management; AUM): ~Rs.42,000 crore * Source: CRISIL estimates 13

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