This RBI circular could mean fewer ARCs to resolve toxic assets
₹300 crore, from ₹100 crore at present. The regulator offered a glidepath to reach ₹300 crore by 31 March 2026, with the target for March 2024 being set at ₹200 crore. Industry executives and external experts said this could prove detrimental for smaller ARCs that lack the ability to meet the NOF norms.
Net owned funds is similar to net worth which is defined as the difference between what a company owns and its liabilities. Lenders sell stressed loans to ARCs at a discount, either in exchange for cash or a mix of cash and security receipts. These receipts are redeemable as and when the ARC recovers the specific loan.
That apart, ARCs charge an asset management fee of 1.5-2% of the asset every year. There were 27 ARCs registered with RBI as on 30 September, showed data from the regulator. Of the 27 ARCs, 11 did not meet the ₹200 crore net owned funds requirement, as per FY23 annual reports analysed in a recent note by industry lobby body Assocham and rating agency Crisil.
The data showed that while seven ARCs had net owned funds (NOF) between ₹200-300 crore, the remaining nine were over ₹300 crore. The ARC industry has little choice since RBI had in the 2022 directive specifically said that non-compliance could lead to prohibition on incremental business till the company reaches the mandated level of net-owned funds. “The impact of amendments can be seen on various fronts, ranging from a strategic change in the way ARCs acquire debt from original lenders to likely consolidation in the industry because of the higher minimum NOF requirement," said the Assocham-Crisil report cited above.
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