ARCs IN INDIA

A well-functioning banking system is the backbone of India’s financial and economic landscape. The system relies on the proper functioning and links between borrowers and lenders. But when borrowers cannot honor their debt, it leads to an increase in stressed assets, non-performing assets (NPAs) and non-performing loans (NPLs) in the system. This results in a decline in the profitability of banks, and also affects India’s economic performance. ARCs like ACRE buy, resolve and turn around assets denominated in INR from distressed to standard state. They thus help unlock the hidden potential of these assets, and play a critical role in driving the country’s economic engine.

EVOLUTION OF ARCS IN INDIA

• 

  Agency to Asset Management Company (AMC)

  Then: Economically acted as agents of banks

  Now: Act primarily as AMC (15% co-investor) for prospective investors

• 

  Growth in Credit
  Underwriting

  Given the investment requirement by ARC’s there is a necessary requirement for strong underwriting

• 

  Value Generated by
  ARC Skillsets

  Value from NPAs is, generated by the strength of the platform, the uniqueness of its client franchise, ARC capabilities, and its robust business model

• 

  Building Operational
  Efficiencies

  ARCs are now required to build operational efficiencies to actively manage and turn around distressed assets.

ARC REGULATORY OVERVIEW

• RBI regulations

  1. Periodical (annual/quarterly) reporting to RBI
  2. Board appointments to be approved by RBI
  3. Audit and inspection of RBI carried out on regular intervals

• Capitalization

  1. Minimum Net Owned Funds (NOF) requirement of INR 300 Cr by Mar-2026 by way of a glide path
  2. Minimum capital adequacy of 15%

• Businesses

  1. Minimum 15% of transferor’s investment in SRs or 2.5% of total SRs issued, whichever is higher
  2. Restriction on businesses that it can undertake

• Accounting Tax

  1. Account norms prescribed by RBI
  2. Evolved rules around taxation

NPA MARKET IN INDIA

KEY OBSERVATIONS