Advisory Group on Asset Reconstruction Firms favoured $20 billion Limit for Investments by FIIs

A government-appointed advisory group on asset reconstruction firms that submitted its report to Finance Minister Pranab Mukherjee favoured $20 billion limit for investments by foreign institutional investors in security receipts (SRs) issued by securitisation firms. The report of the advisory group also recommended a subcap of 10% participation by foreign institutional investors in SRs be removed.

Security receipts are the ones issued by a securitisation company for a period of seven years to qualified institutional buyer or banks as they do not pay cash upfront.

The advisory group constituted to look into the condition of ARCs, in its report recommended that reconstruction firms should be allowed to buy performing loans from banks, arrange them in groups, and issue bonds on such groups or securitise in banking parlance.

RBI rejected the proposal to allow ARCs deal with healthy assets. As per the RBI ARCs should only play the role of resolving only NPAs in the system and should not be allowed to deal in healthy assets.

The committee however suggested that ARCs can hold these assets through Special Purpose Vehicles (SPVs), which will be regulated according to RBI guidelines.

About ARC

ARCs came into business after the government passed the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

The primary purpose of an ARC is to help the banking system get rid of NPAs to avoid crisis in the financial system. The ARCs function by buying non-performing assets (NPAs) from banks and financial institutions at a discount (mutually agreed upon) through a trust following which it recovers the outstanding amount, and earns a fee for managing the trust.

The ARCs however did not manage to taken off in India. The pace of new bad loans with banks far exceeded the amount transferred to ARCs. between March 2009 and March 2010, even as bad loans with banks increased by Rs 15774 crore, transfers to ARCs stood only at rs 10675 crore.

Credit rating agency Crisil’s report in September 2011 projected gross non-performing assets (NPAs)- essentially, bad loans outstanding to touch 3% of assets in March 2012, against 2.3% in March 2011.