FM proposes ARC to tide over NPAs

Finance Minister Nirmala Sitharaman’s proposal for stressed asset resolution through the setting up of an asset reconstruction company and asset management company is likely to help public sector banks tide over the wave of Covid-19 related bad loans.

“An Asset Reconstruction Company Limited and Asset Management Company would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds and other potential investors for eventual value realisation,” said the Finance Minister in the Union Budget 2021-22 on Tuesday, noting that the high level of provisioning by public sector banks of their stressed assets calls for measures to clean up the bank books.

This, in effect, would mean the setting up of a bad bank to take over the non- performing assets of public sector lenders.

Financial Services Secretary Debasish Panda said the ARC-AMC would be put up by public sector and private banks and will first of all perform aggregation of assets. Some government support would be given if required, but banks would be expected to put together the initial capital.

“Existing ARCs are mostly thinly capitalised and unable to deal with complex assets,” said Panda at the post Budget conference, adding that it will be professionally set up. Some dispensation is needed from the regulators but it is being worked out, he said.

Setting up of a bad ban has also been a key wish list of the banking sector, which has been concerned about Covid-19-related loan defaults, and experts have said this would help boost incremental lending that would in turn spur growth.

“It will expedite the resolution of bad assets. Taking over the bad loans reduces the provisioning requirements and enhances the ability of the banks to lend to the productive sectors of the economy to spur growth,” said Rajkiran Rai, Chairman, Indian Banks’ Association (IBA) and Managing Director and CEO, Union Bank of India.

Karthik Srinivasan, Senior Group Vice-President, ICRA, noted that the proposed ARC-AMC is expected to result in faster and a better resolution of stressed assets of lenders. “Apart from improving reported financials, this will also free up the bandwidth of management to focus on core lending operations,” he said.

The Reserve Bank of India, in its latest Financial Stability Report, has estimated that the gross NPAs of banks may increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline scenario. In a very severely stressed scenario, it could rise further to 14.7 per cent.

However, the All India Bank Employees’ Association said the move will benefit corporate defaulters. “Bad loans and NPAs in the banks have been increasing year after year because of corporate defaulters. Instead of taking tough action on them, the government wants to whitewash the balance sheets by shifting these bad loans from the books of the banks to the ARC or the bad bank,” said AIBEA in a statement.

Banks that have announced their third quarter results have already been showing a rise in pro forma NPAs, and a final picture on bad loans would emerge after the Supreme Court verdict.

Among public sector lenders, Bank of Baroda had reported proforma GNPA ratio and NNPA ratio at 9.63 per cent and 3.36 per cent as of December 31, 2020. Similarly, Union Bank said its pro forma gross NPA was at 15.29 per cent at the end of the third quarter.