As a crucial part of the resolution of the non-performing assets (NPAs), Rs.2.44 lakh crore worth of gross NPAs have been sold to the Asset Reconstruction Companies (ARCs) while the current stock of stress in the Indian banking system is estimated at Rs.11.80 lakh crore, a study has stated.

Seeking a level playing field with the banks in terms of conversion of loans into equity, the study said though a huge chunk of stressed assets, as much as 15 per cent of advances (9.84 per cent NPAs and 4.2 per cent restructured assets), is a matter of concern for the economy, it offers huge opportunity for the ARCs.

The study was carried out jointly by industry lobby Associated Chambers of Commerce and Industry of India, Society of Insolvency Practitioners of India and Edelweiss. 

"While ARCs are an important means to help banks manage NPAs, at its heart, ARC business is a resolution business and not a recovery business. ARCs do not have any magic spell for revving a non-performing assets," Assocham Secretary General DS Rawat said.

He said the process of resolving a stressed asset requires "aggregation of debt outstanding to various banks, arrangement of capital, right sizing the business and bringing in a strategic partner".

"This requires a period of 3-5 years", he added.

As many as seven ARCs have largely been promoted by banks even as foreign direct investment has also been permitted into the asset reconstruction, which the study paper said should be treated as a resolution and not a recovery business.

The study said there must be a level playing field along with more teeth to ARCs for dealing with the promoters of companies owing a high level of bank debt which has decayed into NPAs. 

"At least 51 per cent conversion should be allowed to ARCs while reconstructing an asset," it noted.

"The ARCs are not on par with the banking system when it comes to equity conversion. While RBI has given sweeping powers to bank in form of Strategic Debt Restructuring (SDR) and even in case of normal debt conversion, ARCs are restricted to maximum 26 per cent of equity share in a particular company," it said.

The study stressed that incentive structure has to be introduced for banks where 100 per cent debt is sold to ARCs. 

"The banks are not following a consortium approach which is a major issue that leads to delay of 12-18 months for debt aggregation. ARCs have to resort to a time-consuming process of dealing with each bank separately, often at different commercial terms," it said.

"The companies under reconstruction require working capital and often the non-fund based requirements are high. The banks selling NPAs to ARCs, cannot lend, while non-bank entities, such as private equity /Non Banking Financial Company, demand very high interest along with priority in repayment over existing debt," it added.

ARCs have been doing a lot of work to ensure that the banking system is relieved from the structural NPA problem which they are currently facing, the study said.