Govt plans to defuse ticking bank bomb

Finance Ministry, Niti Aayog pitch for state-owned asset reconstruction company with govt, RBI contribution

Written by P Vaidyanathan Iyer | New Delhi | Updated: February 1, 2016 2:10 am
bad loans, rbi, india economy, ARC, Niti aayog, IMF, finance ministry, raghuram rajan, rajan, bad loans report, india news Finance Minister Arun Jaitley has convened a meeting in mid-February of experts, including from the IMF, to discuss ways to operationalise an asset reconstruction company, or ARC. (Express Photo)

With the bad loan crisis casting a shadow on the ability of banks to lend as and when private sector investment picks up, the Prime Minister’s Office (PMO) is deliberating on a proposal to set up an asset reconstruction company with equity contribution from the government and the Reserve Bank of India (RBI).

It’s learnt that the Union Finance Ministry and Niti Aayog have separately pitched for “taking the tumour (of non-performing assets or NPAs) out” of the banking system. Apart from making balance sheets look better, a recapitalisation will enable banks to service the growing credit needs of the economy.

Finance Minister Arun Jaitley has convened a meeting in mid-February of experts, including from the International Monetary Fund (IMF), to discuss ways to operationalise an asset reconstruction company, or ARC. The IMF is expected to share its global experience on a relief programme for troubled assets.

An ARC acquires bad loans from banks and financial institutions, usually at a discount, and works to recover them through a variety of measures, including sale of assets or a turnaround steered by professional management. Relieved of their NPA burden, the banks can focus on their core activity of lending.

“There has been a lot of discussion within the government on the crisis in banking. The RBI, too, has taken some tough action during the last year-and-a-half. But bank NPAs continue to be the ‘white elephant’ in the cupboard. Too little has happened all this while to pull the elephant out,” a senior government functionary, who did not wish to be named, told The Indian Express.

bad-loansIt’s learnt that the finance ministry first floated the idea of an ARC last May, following which a presentation was made to the PMO. But RBI Governor Raghuram Rajan, who was present, was not comfortable with the idea of government equity in ARCs and feared a “moral hazard”. “Why should the taxpayer pay for reckless lending by banks in the past? The RBI was averse to the idea of government or the RBI contributing equity to the asset reconstruction company,” said a source.

Tightening the screws over banks and errant borrowers, the RBI then took a series of important steps during 2014-15. These include tightening the Corporate Debt Restructuring (CDR) mechanism, setting up a Joint Lenders’ Forum, prodding banks to disclose the real picture of bad loans, asking them to increase provisioning for stressed assets, introducing a 5:25 scheme where loans are to be amortised over 25 years with refinancing option after every five years, and empowering them to take majority control in defaulting companies under the Strategic Debt Restructuring (SDR) scheme.

With these steps, Rajan hopes banks would be able to clean up their balance sheets by March 2017. Banks, however, want more time to achieve this.

Even as the ARC plan was being discussed in the finance ministry between May and July last year, the government announced in August that it would provide Rs 70,000 crore towards recapitalisation of banks over the coming four years.

But there is a growing sense in the government that mere recapitalisation without taking the bad loans out may not suffice. “Equity infusion by the government and the RBI would lend credibility to the ARC. Government’s direct presence will also put pressure on banks and corporates to own up their bad loans and prompt them to shed these by taking a hair cut,” said a source involved in the deliberations.

A source said tackling the bad loan mess requires multiple instruments. “An ARC is a potent instrument,” the source said. While there are more than a dozen private ARCs already registered under the SARFAESI Act, they have achieved little. The 15 ARCs have a combined net worth of Rs 4,000 crore and as on March 2015, they have managed to resolve less than a third of the assets acquired.
“(The) Government and RBI have to be invested to bring credibility. Moreover, public sector banks are scared to sell to private ARCs for fear that the quantum of hair cut can always be questioned by the government’s auditor, vigilance or at worse be probed by the intelligence agencies,” the source said.

Each year, the government ARC can buy NPAs to the tune of, say, Rs 1 lakh crore, by running an auction amongst banks. “In an auction, the ARC can choose the assets. It will be for the banks to make it attractive for the ARC. The banks will automatically take a haircut in the process. This will ensure they are paying a price for mismanagement and do away with RBI’s concerns of a moral hazard,” another source said.

The biggest challenge, according to officials familiar with discussions on the issue, is to get professionals or specialists to run the ARC. “An operation of this scale has not been run in India so far. The ARCs can float different funds for different sectors. If the government agrees to guarantee the principal of the bonds floated by ARCs to raise funds for further acquisition of NPAs, it will attract domestic as well as foreign investors,” the source said.

BAD LOANS

For the year-ending March 2015, gross NPAs of scheduled commercial banks stood at Rs 3.02 lakh crore in absolute terms, or 4.6 per cent of total advances. Six months later, this rose to 5.1 per cent. The stressed advances ratio — stressed assets is defined as bad loans plus loans that have been restructured by banks — increased to 11.3 per cent in September 2015 from 11.1 per cent in March. Private estimates of stressed assets, however, are significantly higher and vary between 17.5 per cent and a quarter of all bank advances.

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  1. K
    Kay
    Feb 1, 2016 at 5:54 am
    Let the defaulting banks whose Directors embazled and steal bank funds suffer not the public tax payers money be pumped to banks. Let these mighty banks suffer and the mighty industrialists who stiffened the wealth to foreign banks, catch that category as in election comparing BJP said black money shall finance India. What happen to all thar.
    Reply
    1. K
      Krishna Bhagawan
      Feb 1, 2016 at 6:35 pm
      This is why an exit policy for firms is a necessity, otherwise look at Kingfisher / Air India
      Reply
      1. T
        TIHAEwale
        Feb 1, 2016 at 7:18 am
        Savers are caught in a trap. As long as Bank is Nationalised at least Principle is safe. Depositing Companies is a risky venture where when companies default then the saver is left holding just a piece of paper. This Govt sponsored ARC is all sham. Simply tax payers settling the loot bill. Recover all the NPAs from GM and above then only future NPAs will not arise. So only one thing is certain Raghuram Rajan will not get a second term as his honest opinion regarding ARCs is diametrically opposite to those of fore DDCA President and his boss Feku56 whose is getting exposed with every ping day
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        1. T
          TIHAEwale
          Feb 1, 2016 at 7:18 am
          This Govt sponsored ARC is all sham. Simply tax payers settling the loot bill. Recover all the NPAs from GM and above then only future NPAs will not arise. So only one thing is certain Raghuram Rajan will not get a second term as his honest opinion regarding ARCs is diametrically opposite to those of fore DDCA President and his boss Feku56 whose is getting exposed with every ping day
          Reply
          1. V
            Vikrant
            Feb 1, 2016 at 2:07 am
            Another paap of past 60 years of Congress rule. This person who pretends to be messiah of garib was looting Tax paid by common man of India and helping his friends in corlorates to loot the bank deposits of common man by granting them bank loans. Congress has looted the country and kept poor people poor by dividing them in castes
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            1. A
              Amit
              Feb 1, 2016 at 4:07 am
              Capitalists begging for a SOCILIAST bailout . So now the taxpayer is being forced to bailout reckless Banks and the capitalists that procured loans with the help of their corrupt political masters. There are already Pvt ARC's (et Reconstruction companies) who have been buying bad loans , why should the Govt create another ARC with Public funds ? Because The Govt wants to force the Public ARC to buy worthless Junk that even Pvt ARC's will not touch . Also do not be under any illusion that ARC's pay cash for bad ets at a discount. They DO NOT ! often the Pvt ARC's buy bad loans from banks and in turn offer an equity stake in the ARC itself. In other words - bad debt is simply converted to a bad investment . Mere accounting gimmick.
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              1. T
                Think
                Feb 1, 2016 at 2:32 am
                After 60 years, it was 4.5%. And within a year BJP pushed it up to 5.1%.
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                1. A
                  Arun
                  Feb 1, 2016 at 12:13 pm
                  If the business houses cannot repay, then they should be allowed to die. The government could use the funds with which they want to re-finance these business houses, for paying the arrears and dues of their employees. By disposing the ets of them, the government could collect the amount paid as arrears and dues to the employees of these business houses. Unless this is done the big business houses will not bother to repay the banks.
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                  1. A
                    Arun
                    Feb 1, 2016 at 3:42 am
                    Most of the 3.02 lakh srores bad loan is the loan provided by banks to CORPORATES. Most of the Corporates in India is owned or controlled by the UCVH (upper caste veg hindus ). Therefore, the present RSS government wishes to provide Corporates with more funds.
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                      Arun
                      Feb 1, 2016 at 5:05 am
                      That is exactly the point I have put forth, but diplomatically. You are right.
                      Reply
                      1. A
                        Arun
                        Feb 1, 2016 at 6:08 am
                        The Directors of the banks with over 1 crore bad loan should be made responsible for the situation. Atleast they should be sacked immediately.
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                        1. P
                          PN badri
                          Feb 1, 2016 at 2:13 pm
                          According to parliament standing Committee NPA is around 1.6 lakh cores and they are also insisting publishing the defaulters details but the pro corporate government refused to do so like refuse to release names of the account holders of unaccounted foreign bank . Ruling party may different but their aim to protect economic offenders is same is not surprising to us.
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                          1. K
                            Karunakaran
                            Feb 1, 2016 at 4:13 am
                            BJP wants to give the impression that they are in control of India's economy. Unfortunately they don't have a clue of what is going on. India's economy is in shambles. The runaway losses with PSUs, nationalised banks, Air India and the dreadful situation with the railways is just mindboggling. Instead of fixing these problems, the BJP has gone into another terrible quicksand: the smart cities, which will require borrowing US$150 billion. Indian taxpayers will be paying off these borrowings for a long time. And then there is the pet project of the mann-key man, favouring only the Gujjus: the Rs 98,000 crores worth of Bullet train (for Gujju benefit) to be paid for by all the Indian taxpayers. This government has no clue about job creation.
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                              AMAN NAGPAL
                              Feb 1, 2016 at 10:41 am
                              My opinion is that ARC need to be started with promoter being top 5 PSU Banks and capital of new ARC is considered as investment in books of banks. Any profit earned by ARC is shared among these PSUs It also helps in proper management of NPA.
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                                ah
                                Feb 1, 2016 at 5:23 am
                                It is the BIG BORROWERS who are defaulting that is 90% of NPA and not small borrowers ................ lets see how much this govt. is able to Govern .............................
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                                  FRANCIS COUTINHO
                                  Feb 1, 2016 at 6:24 am
                                  PLEASE GET TO THE FACTS BEFORE YOU MAKE SUCH COMMENTS.
                                  Reply
                                  1. D
                                    DasG
                                    Jan 31, 2016 at 11:05 pm
                                    This is Chiddu and previous reckless corrupt Congi legacy of gross economic mismanagement. Np wonder the same Congi crooks are throwing spanner in the economic work of NDA by disrupting parliament and stalling message of bill using flimsy excuses. Sun, mummy and Congi minions crooks's spite of NDA, lust of retaining power and showing they know better want and are willing to play with lives 1300 million people future!
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                                    1. H
                                      Hindu
                                      Feb 1, 2016 at 4:46 am
                                      Karunakaran...WHY blame the BJP ??? The REAL CULPRITS are Sonia and family, MMS, M Karunanidhi and familt, Chidambaram....Besides the Managers of the PSU Banks receive kick backs when they sanction the loans. If Modi manages to confuscate the ets of all those named above India would be in SURPLUS.
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                                      1. N
                                        Nazo
                                        Feb 1, 2016 at 5:16 am
                                        A person who was running the Delhi Cricket ociation is running the country who also lost the election. What more can we expect from him and the PM has no clue about the economy or the environment. I applied for a job where there were hundreds of people competing me for a single post and they asked hundreds of questions at the interview but for the post of FM no questions asked. They do not have a road map, an agenda or a target as to where the country should lead to in 5 years. Even if they have they do not know how to get there. Instead of an ARC they should have had a proper third party loan apprising company provided it too is not corrupted. Corruption is a million headed monster.
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                                        1. K
                                          kamath Ramesh
                                          Feb 1, 2016 at 8:07 am
                                          Every time banks end up with bad loans and have to write off. Of course every business have bad loans but the percentage in bank should be very minimal as it lends only against good business model or under strong collateral. Only reason for bad loan is bank is not giving much attention on the management of the company and their performance. Do not take strong action on defaulters and give long ropes to grow it big. bank do not prevent the funds diversion to other non rated business of the promoters.
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                                            kulaputra kulaputra
                                            Feb 1, 2016 at 1:23 am
                                            This is another expensive absurd band-aid solution. The finance minister's IQ needs to be questioned here. I would rather capitalise a new bank rather than inject funds into an already corrupt banking system. Do not see any logic against the argument of Dr. Rajan about taxpayers being asked to fund bank loans. And finally no word about stopping political interference in lending. If the finance minister is serious, he would first have all defaulters who are MPs (like Vijay Mallya) resign from their positions. Let us see some real action sir. Do not do to taxpayers what stan is doing to India
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