Thursday, 13 April 2017

Bad Loans is Good Business

Bad loans business is getting better as the banking regulator RBI tightens norms for dealing in stressed assets market.

The asset reconstruction companies (ARCs) now need enhanced net owned funds of Rs 100 crore as compared to just Rs 2 crore earlier. As a result, larger ARCs backed by strong promoter groups would be on a firm footing to attract capital from external sources as 100 per cent foreign direct investment is permitted in the sector, Crisil says in its report. Many of the smaller ARCs may be on way to consolidate through merger with top five players that account for 90% of total assets under management of 23 ARCs.

The recent tightening of ARCs' capital requirements will lead to consolidation in the industry and that bigger players stand to benefit from the move, says a report.

The Reserve Bank last week increased the net-owned funds for asset reconstruction companies (ARCs) to Rs 100 crore from a meagre Rs 2 crore. Last April it had increased the upfront payment requirement to 15 per cent of the asset value from 5 per cent.

Crisil believes these are among a series of steps taken by RBI to strengthen the ARC ecosystem that will attract players with deep pockets, enhance transparency in asset sales, improve recoveries and open up scope for consolidation.

Given the thicket of rule changes, larger ARCs will be on a firmer footing, especially those backed by strong promoter groups with the ability and intent to infuse capital, and relatively better capability to attract capital from external sources as 100 per cent foreign direct investment is permitted in the sector, says the report.

The ability and intent of promoters and investors in smaller ARCs to infuse capital will be a monitorable and would potentially be a catalyst of consolidation.

According to Crisil, of the 23 ARCs, six are comfortable in terms of the revised net-owned funds requirement and other stringent norms. But those struggling to infuse capital or raise external funds and lacking in specialist manpower will get marginalised further.

"The top five players (Edelweis, JM Financial, Arcil, Kotak etc) account for around 90 per cent of total assets under management. With tighter regulations, we believe their market share will consolidate further and smaller ones may merge with larger rivals, or they could become takeover targets for large private equity investors and stressed asset funds wishing to enter the business," the report said.

It can be noted that from April 1, 2017, the RBI has increased the provisioning requirement for banks investing over 50 per cent of the value of stressed assets (the limit subsequently to be reduced to 10 per cent from April 2018) sold by them in the security receipts issued in lieu.

The RBI intends to ensure that any NPA sale is a true sale conducted through a transparent process where the ARC ends up with significant skin in the game so as to maximise recoveries.

The strengthened framework will affect the volume of asset sales as banks are reluctant to take adequate haircuts, says the report, adding however, it will lead to more cash- based sale which would need higher capital.

Asset sales spiked in March quarter of fiscal 2017 before the new provisioning norm kicked in. According to its estimates, Rs 21,000 crore of NPAs were sold in the March quarter taking the total outstanding assets under management with ARCs to Rs 75,000 crore. 

Monday, 3 April 2017

Infrastructure Investment Fund (InvIT)

InvITs are mutual fund like institutions that can play a crucial role in meeting India’s huge infrastructure requirements, estimated to be Rs 4.3 lakh crore (Rs 4.3 trillion) over the next five years. The InvIT offers an opportunity to promoters of projects to sell their stake in completed projects to the trust, which in turn can raise long-term and tax-free funds from unit holders. Infrastructures developers like IRB, GMR, IL&FS and Reliance Infrastructure are keen to launch InvIT to raise funds, a move which can potentially pump in liquidity in the otherwise cash-strapped infrastructure sector.
Infrastructure is an asset class in India that is garnering attention among investors worldwide and could be the perfect asset for pension plans seeking to match long-term liabilities, diversify portfolio holdings, lower the risk of capital loss and, in some cases, hedge inflation as well.
Hence, large foreign pension plans, foreign endowment funds and many domestic yield focused funds are the targeted investors for InvITs.
InvITs will provide a suitable structure for financing/refinancing of infrastructure projects in the country.

Several existing infrastructure projects in India are delayed due to
·         Increasing debt finance costs
·         Locked up equity of private investors in projects
·         Lack of international finance
·         Project implementation delays caused by global economic slowdown, cost overruns, inability of concessionaire to meet funding requirements on time, etc.

InvITs, as an investment vehicle, may aid:
·       Providing wider and long-term re-finance for existing infrastructure projects.
·       Freeing up of current developer’s capital for reinvestment into new infrastructure projects.
·       Refinancing/takeout of existing high cost debt with long-term low-cost capital and help banks free up their funds for new funding requirements.

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