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P. Devarajan

TALKS between banks and RBI on guidelines for asset reconstruction companies (ARCs) seem to be stuck on pricing of assets. ARC managers favour a system of asset pricing which takes into account the current value of the impaired asset minus bank provisioning to reduce financial outgos to banks.

Sniffing the game, banks are protesting arguing provisioning has nothing to do with the market value of the impaired asset. Bank provisioning comes out of profits and is applied by the RBI rulebook. Banks would prefer auditors and chartered accountants to value the market price of the NPA put up on sale to an ARC.

The concept of ARC is one needing immediate scrapping as it is at best ridiculous. If ARCs can sell impaired or repair impaired assets, so can bankers who are in the business for long. The ARCs are a backwash of the first Narasimham Committee report which has a complicated chapter on it.

There is a second part to the stand-off. As per law, FIs providing long term funds have first charge on assets, with banks holding second or third charge; on current assets, banks hold the first charge, but in the case of an NPA current assets are usually nil.

One banker said, "The first sign of an advance going sour is when the cash flows get affected with the ratio of current assets to current liabilities hurt.''

In the event, FIs get away with the sale proceeds of the NPA from the ARC, leaving banks squirming.

At a recent meeting with RBI, some bankers argued for a pro rata sharing of sale proceeds irrespective of the nature of charge.

That is going to be difficult as RBI cannot change the basic law, though it could enforce a MoU between long-term and short-term lenders before transfer of NPAs to an ARC.

At least one private bank, flaunting its close ties with the PMO, is reportedly trying to scupper the game by holding up any reasonable change. The talk on Mint Street is even the RBI is quite uncomfortable dealing with this banking entity.

A similar problem has cropped up over initiating action under the Securitisation Bill. The Bill says: "In case of financing of a financial asset by more than one secured creditor or joint financing of a financial asset by secured creditors, no secured creditor shall be entitled to exercise any or all of the rights conferred on him unless exercise of such right is agreed upon by the secured creditors representing not less than three-fourth in value of the amount outstanding as on a record date and such action shall be binding on all the secured creditors.''

With FIs holding first charge, there is some inequity against banks.

A leading Government bank has decided not to give its assent to any proceedings till the sale proceeds under the Bill are shared on a pro rata basis and not on first charge rules. But this player is a loner.

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