Close to 12 companies applied to the RBI for licenses to start an asset reconstruction company in India following the passing of the Bankruptcy Bill (2016) in the Lok Sabha. Applicants ranged from foreign distressed asset specialists to domestic investors with access to considerable funds.
Stressed assets (which include gross bad loans, restructured assets and written-off accounts) for the banking system rose to 14.5%, as of 31 December 2015, compared to 9.8% in March 2012, according to data from RBI.
ARCs play an important role in reconstruction of such stressed assets, RBI said in 2014 when it released a new framework to revitalize the distressed assets.
Applicants who’ve applied include JC Flowers & Co., in partnership with Ambit Holdings Pvt. Ltd., domestic financial services firm IIFL Holdings Ltd. and Sudhir Valia, former CFO of Sun Pharmaceuticals.
In order to tackle $117bn of bad loans threatening to derail Indian Prime Minister Narendra Modi’s growth plans, rules were eased by the government allowing a single investor to own 100% of an asset reconstruction company. Previously, the ownership of ARC’s was capped at 50%.
As part of the federal budget unveiled by India’s Finance Minister Arun Jaitley yesterday, ownership rules for ARCs were eased from 1 April 2016 onwards. Mr. Jaitley also allocated INR 250bn for the recapitalization of state-owned banks in 2016, similar to the outlay in 2015.
There are 15 ARCs operational in India after the nation passed the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act in 2002 to help reorganize non-performing credit.
Loans in India increased by 11.5% for the last 12 months through 5 February 2016, less than the five-year average of 14.7%, as per central bank Reserve Bank of India’s data.
ARCs are expecting record business in 2016 after RBI Governor Raghuram Rajan set banks a deadline of March 2017 to clean up their balance sheets. He allowed those completing a deal by March to spread losses from the sale of distressed-assets over two years.