NEW DELHI: A government-appointed advisory group on asset reconstruction firms has favoured $20 billion limit for investments by foreign institutional investors in security receipts (SRs) issued by securitisation firms.
The report of the advisory group, which has now been submitted to Finance Minister Pranab Mukherjee, had also recommended that the sub-cap of 10% participation by foreign institutional investors in SRs should be removed.
Security receipts are issued by a securitisation company to qualified institutional buyer or banks as they do not pay cash upfront. They are issued for a period of seven years.
The government had constituted an advisory group to look into the condition of ARCs, which in its report among other measures, had 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.
“There is a difference with the RBI only on this (healthy loans) issue. We expect all other proposals to sail through,” said a member of the advisory group, requesting anonymity. RBI has rejected the proposal to allow ARCs deal with healthy assets. The committee had suggested that ARCs can hold these assets through Special Purpose Vehicles (SPVs), which will be regulated according to RBI guidelines.
“RBI has rejected this and said that ARCs should play the role of resolving only NPAs in the system and should not be allowed to deal in healthy assets,” said a government official.
The main purpose of an ARC is to help the banking system get rid of NPAs to avoid crisis in the financial system. They function by buying non-performing assets (NPAs) from banks and financial institutions at a discount (mutually agreed upon) through a trust. It then recovers the outstanding amount, and earns a fee for managing the trust.
ARCs came into business after the government passed the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The ARCs have not taken off in India. The pace of new bad loans with banks has always exceeded the amount transferred to ARCs. For example, between March 2009 and March 2010, even as bad loans with banks increased by Rs 15,774 crore, transfers to ARCs trailed at Rs 10,675 crore.
This differential is likely to increase as, between March 2010 and September 2011, bad loans of banks are up 40%. A report in September 2011 by credit rating agency Crisil projected gross non-performing assets (NPAs) — essentially, bad loans outstanding — to touch 3% of assets in March 2012, against 2.3% in March 2011.