The regulatory clampdown has impacted the sale of bad loans to Asset Reconstruction Companies (ARCs) over the past three to four years. The RBI’s diktat last Friday can hurt sales in the near-term further.
Between 2016-17 and 2018-19, security receipts (SRs) issued by ARCs (essentially the price paid for acquiring the bad loans) have been in the range of ₹17,000-18,000 crore. While this is a vast improvement from weak sales of ₹9,800 crore in 2015-16, it is still lower than the peak levels of 2013-14 and 201415, when value of SRs issued were about ₹20,000-22,000 crore.
In a bid to improve transparency in the sale of bad loans to ARCs and ensure ‘true sale’ of assets, the RBI disallowed ARCs from buying bad loans bilaterally from banks or financial institutions that are the sponsors of the ARC. It also barred ARCs from buying assets from lenders that have lent to them, subscribed to the fund or are part of the same group as the ARC. They can, however, participate in auctions of the assets, provided these are conducted in a transparent manner, on an arm’s length basis, with pricing determined by market forces.
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