Covid hits NPA recoveries by asset reconstruction companies

Chennai (IANS) The ongoing coronavirus pandemic has also affected Asset Reconstruction Companies (ARC) as they are expected to face disruptions in their recoveries from non-performing assets received from banks, credit rating agency ICRA Ltd said.

In a statement issued on Thursday, ICRA said the recoveries for ARCs are affected due to deferment or failure of auctions due to unsatisfactory bids or absence of any bidders, default or delay in payment as per the agreed settlement plan or agreed restructuring terms.

This aside, resolutions under the Insolvency and Bankruptcy Code (IBC) proceedings have come down during the first quarter of current fiscal.

According to ICRA, only 16 corporate insolvency resolution processes (CIRPs) ended in resolution, compared to 35 in the previous quarter.

Expecting lack of interest for bidders and to provide adequate opportunities for prospective resolution applicant to conduct due diligence, the Committees of Creditors (CoCs) have been willing to extend the bid submission deadlines, ICRA said.

“Recovery for ARCs depends on the value realisation from the underlying securities, so willingness and fund availability with prospective acquirers is of utmost importance. As currently, the primary focus of the businesses is to set their own house in order first and preserve liquidity, acquirers are less keen to invest in further assets even when the same is available at an attractive valuation,” Abhishek Dafria, Vice President and Group Head – Structured Finance, was quoted as saying in the statement.

ICRA evaluates the possible recovery from the non-performing assets of the ARCs and assigns recovery ratings on a scale of RR1+ to RR5 to the Security Receipts (SRs) issued by the ARC.

Due to an expected increase in the recovery timeline as well as decline in expected recovery value on the SRs, the rating agency has observed higher downgrades.

ICRA said 37 per cent of trusts issuing SRs downgraded (from rated portfolio) carried out basis SRs outstanding as on June 2020, compared to 21 per cent rating downgrades observed in previous surveillance cycle (December 2019).

Specifically, unresolved SRs in older trusts acquired in FY2015 or prior, have seen a higher proportion of rating downgrades.

“We expect the recovery ratings to remain under pressure over the near term until the economy improves such that interest of acquiring entities for the non-performing assets or their underlying securities returns. This could result in further provisioning requirements for ARCs and banks who are investors in the SRs,” Sankha Subhra Banerjee, Assistant Vice President, was quoted as saying in the statement.

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