February 3, 2021 3:05:58 am
The Asset Reconstruction Company (ARC) proposed in the Budget will be set up by state-owned and private sector banks, and there will be no equity contribution from the government, Department of Financial Services Secretary Debasish Panda said on Tuesday. The ARC, which will have an Asset Management Company (AMC) to manage and sell bad assets, will look to resolve stressed assets of Rs 2-2.5 lakh crore that remain unresolved in around 70 large accounts.
Of the existing ARCs, only 3-4 are adequately capitalised, while the more-than-dozen remaining are thinly capitalised — necessitating the need to set up a new structure to resolve stressed assets urgently. While the government will not provide any direct equity support to the ARC, it may provide sovereign guarantee that could be needed to meet regulatory requirements. The transfer of stressed assets to the ARC will happen at net book value, which is value of assets minus provisioning done by banks against these assets. The bank will get 15 per cent cash and 85 per cent security receipts against bad debt that will be sold to the ARC. Panda said this structure will reduce the load of stressed assets on the bank balance sheet and look to resolve these bad debt in a market-led way.
With most banks expected to be on board this company, the resolution is expected to be faster. Since most commercial loans are granted by a group of 8-10 banks, under the existing resolution mechanism some banks would typically oppose the resolution due to differences, which slowed the resolution process.
Development financial institution
The government could subsume India Infrastructure Finance Company Limited (IIFCL) into the proposed development financial institution (DFI), which is being set up to enable long-term infra funding worth Rs 5 lakh crore in 3 years. The National Bank for Financing Infrastructure and Development (NaBFID), the proposed DFI, will anchor the National Infrastructure Pipeline (NIP), Panda said.
The Reserve Bank of India will regulate the proposed DFI, which will be fully owned by the government in initial years. The government could pare its stake to 26 per cent over time. “It can play the role of facilitator and a catalytic role as far as financing infra concerned. Secondly, it will be a market maker, and play a very proactive role in developing and nurturing the bond market,” he said.
Market-led solutions to challenges
The focus on reforming the financial sector will see a proposed asset reconstruction company taking over bad debt of around Rs 2.5 lakh crore. The Finance Ministry has tried to find market-led solutions to challenges in the financial sector.
With regard to the privatisation of two state-owned banks and one insurer, the companies will be identified by a government-defined process. NITI Aayog will do the first round for selecting, then it will go to the core group of secretaries on disinvestment and, thereafter, it will be examined by the alternate mechanism.
The government’s approach is to retain a core of PSBs, while privatising a couple of them, he said.
State-owned banks’ consolidation over the last few years have helped in strengthening them and the Finance Ministry expects the three public sector banks— Indian Overseas Bank, Central Bank of India and UCO Bank — to be out of the RBI’s prompt corrective action (PCA) framework by the fiscal year-end as their financial health has improved, he said.
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