New Delhi, March 15: Asset reconstruction is likely to emerge as a major business area for non-banking financial companies (NBFCs) in India, according to credit rating agency Icra.

“The business of asset reconstruction is likely to emerge in the NBFC sector following the passage of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi),” said the Icra study.

The government has permitted foreign direct investment of up to 49 per cent in asset reconstruction companies (ARCs) which acquire non-performing assets from banks and financial institutions.

ARCs, created following the Sarfaesi Act, acquire idle assets from banks or financial institutions along with mortgaged securities. The act provides full right to lenders to take possession of the mortgaged security without judicial intervention.

Till now, the RBI has granted licences to three ARCs, while some banks are also planning to float ARCs. NPAs of public sector banks stand at around Rs 60,000 crore.

The study also said in the wake of rising competition from commercial banks, NBFCs might consider becoming full-fledged banks.

The conversion of NBFC into a full-fledged bank has many positive aspects. With statutory constraints on raising cheap retail deposits, NBFCs have found it difficult to protect interest margins, putting pressure on profitability, the study said.

By converting itself into a bank, an NBFC will have access to short-term retail deposits, which will reduce its funding costs.

A universal bank would also be expected to provide the full range of banking products to its customers, from small loans for retail individuals to fund projects for companies and multinationals, the study said.

Icra said the NBFC sector in India is characterised by a large number of players, many of whom are heterogeneous. Of the 572 NBFCs at the end of 2004-05, there were 316 hire purchase companies, 58 loan companies, 38 equipment leasing companies, three residuary non-banking companies and others (157).

The three residuary non-banking companies accounted for 36 per cent of the outstanding assets of Rs 52,900 crore and a market share of 82 per cent of the public deposits held by all NBFCs at the end of 2004-05, the study said.