ARC role in resolution may help pare NPAs to Rs 9.1 trn by March: Crisil

With the share of cash deals rising, discounts could remain high. To make way for newer acquisitions and attract new and repeat investors, ARCs must quickly resolve assets and redeem security receipts

The gross non-performing assets of the Indian Banking systems may decline to Rs 9.1 trillion by March 2020 from Rs 9.4 trillion a year ago, on increased level of stress resolution and the growing role of Asset reconstruction companies (ARCs), according to Crisil.

Large stressed borrowers have debt aggregating to Rs 5.4 trillion, which is a huge playing field in itself for investors. Of this, National Company Law Tribunal (NCLT) list-1 and list-2 account for about Rs 2.1 trillion and existing stock of NPAs make up another Rs 2 trillion.

Over and above this, assets of around Rs 1.3 trillion are estimated to be under stress but haven't been recognised as NPAs yet. These assets could potentially slip into NPAs over the near to medium term, the rating agency said in joint study with Associated Chambers of Commerce (Assocham).

Power, infrastructure and steel together make up about half of the Rs 4.1 trillion in stressed assets. Power sector accounts have the largest share, and resolution in this sector has not been significant.

“The revised stressed asset framework is expected to benefit stressed power sector assets that were operational and on the verge of being referred to insolvency proceedings under IBC. The amount involved is estimated at Rs one trillion (as on March 31, 2019)," Crisil said.

The regulatory changes in recent years have been aimed at bringing asset reconstruction companies (ARCs) into play and diversifying the potential investor base for stressed assets.

With the norms for both, domestic and foreign investments in ARCs and security receipts (SRs) having been eased, and with the business model of ARCs becoming more capital-intensive, the partnership model will be the way forward for ARCs, given the higher capital requirement.

This could happen through various routes, ranging from investment in ARCs and SRs, to direct investments in stressed assets. With a higher cash share becoming a norm, ARCs will need to focus more on resolutions and attracting co-investors.

Going forward, with increase in the proportion of cash deals, the discounts are expected to remain on the higher side. To make way for newer acquisitions and also attract new and repeat investors, it is imperative for ARCs to quickly resolve the assets and redeem the SRs.

Reserve Bank of India (RBI's) resolution framework and the Insolvency and Bankruptcy Code (IBC) have paved the way for attracting investors into the stressed-assets space and helped speed up resolution. However, ironing out issues regarding legal aspects and resolution timelines will be critical to boost investor confidence, the report suggested.