Banks are likely to move big-ticket bad loans amounting
to over Rs 60,000 crore to an asset reconstruction company (ARC), which will
focus on turning around non-performing assets (NPAs)
and enhancing value. Banks are
likely to transfer more stressed assets going forward.
The government could invest
up to 50 per cent of the capital in the “bad bank” with a contribution of about
Rs 9,000-10,000 crore, said sources.The ARC is expected to take
up both old and new cases, bankers said.
Banking lobby group Indian
Banks’ Association (IBA) is expected to take the proposal, which is on the
lines of the Sashakt panel recommendations, to the finance ministry
this week.
The panel had recommended
that large bad loans could be resolved under an ARC. The IBA plan envisages
setting up of three entities — an ARC, an asset management company (AMC), and
an alternative investment fund (AIF) to acquire bad loans from banks with
an aim to turn around those assets.
The ARC will acquire and
aggregate the asset, the AMC will manage the assets — including takeover of
management or restructuring of assets, and the AIF will raise funds and invest
into securities floated by the ARC.
The proposed ARC will have to
be backed by the government. A similar arrangement was done in the case of IDBI
Bank where a stressed assets management fund was created, bankers added. The
coronavirus pandemic is expected to result in a rise in NPAs of banks despite
steps like allowing a 90-day moratorium on retail loans and relaxing working
capital financing norms.
In July 2018 a committee
headed by Sunil Mehta, now chairman of YES Bank, had come out with a report on
resolution of stressed assets (dubbed as Sashakt panel). It
recommended the formation of an independent ARC to acquire bad loans
predominantly from public sector banks. The
large assets with exposure above Rs 500 crore with potential for turnaround
were to be managed by an AMC, while the AIF would raise funds and invest in the securities of the ARC.
The
groundwork for forming such a vehicle has been done, keeping in mind the
regulatory environment and conditions in financial sector. This would help to
reduce response time.
According to a CARE Ratings
analysis, gross non-performing
assets of commercial banks declined to Rs 9 trillion in
December 2019 from Rs 9.7 trillion in December 2018. Public sector banks
continued to have the lion’s share (Rs 7.2 trillion in December 2019) of the
total NPA pool.
State Bank of India Chairman
Rajnish Kumar had said last week this is the right time for a structure along the
lines of a bad bank as
most banks are holding very high levels of provisioning of NPAs.
Banks have been making hefty
provisions for bad loans after asset quality review kicked in 2015-16. As a
consequence, the provision coverage ratio of banks has also seen an improvement
from 65 per cent in December 2018 to 71.6 per cent in December 2019, reflecting
an improvement in the financial health of scheduled commercial banks.
Source- Business Standard
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