Revised RBI norms to improve governance, bolster ARCs structurally: Crisil

More stringent NOF guidelines could edge out smaller players, lead to consolidation

The Reserve Bank of India's revised guidelines for asset reconstruction companies (ARCs) would structurally fortify the sector through improved governance norms, better disclosures, and lower funding requirement for asset acquisition, according to Crisil.

However, the guidelines also require ARCs to increase their net owned funds to Rs 300 crore from Rs 100 crore in a phased manner by March 2026 end, which could be challenging for some of the smaller ones.

The business profiles of ARCs will benefit from two crucial changes: first, lower funding requirement for acquisitions, and the second, an option to participate as a resolution applicant under the Insolvency and Bankruptcy Code (IBC), Crisil said in a statement.

The investments by ARCs in security receipts (SRs) are envisaged at a minimum 15 per cent of the investment of the transferor in the SRs, or 2.5 per cent of the total SRs issued, whichever is higher. This is applicable in each asset class under each scheme on an ongoing basis until the SRs are redeemed.

Earlier, ARCs had to invest at least 15% of the SRs issued in each class under each scheme even if there were other investors (other than the selling lenders) present.

Subha Sri Narayanan, Director, Crisil Ratings, said “the revision in the minimum investment in SRs is a significant benefit for ARCs. This will free up their funds and support growth over the medium term.

For cash transactions, the saving could be as high as 80-85 per cent.

Even where the selling entity participates in the transaction, the funding requirement is somewhat lower than the earlier regimen.

The proportion of cash-based transactions in Crisil-rated SRs has been increasing steadily and stood at 36 per cent as of February 2022 compared with 4-5 per cent as of February 2017.

"We expect this momentum to continue with lower requirement of funds for cash-based transactions," Crisil added.