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Budget 2021: Proposed ARC to buy Rs 1.4-1.5 lakh crore of bad loans from banks, say sources

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The proposed Asset Reconstruction Company for cleaning up the bad loans of bank may require around Rs 10,500 crore of capital, senior officials familiar with the development told CNBC-TV18.

The proposed Asset Reconstruction Company (ARC) for cleaning up the banking system’s bad loans may require around Rs 10,500 crore of capital, senior officials familiar with the development told CNBC-TV18.
CNBC-TV18 has learnt that this ARC is expected to buy large stressed assets of at least Rs 1.40-1.50 lakh crore from banks. These assets are largely legacy loans and banks have already provided at least 50 percent or more for these assets, as per senior officials in the know. This forms less than 20 percent of the banking sector’s gross non-performing assets, which stood at Rs 8.99 lakh crore as of March 2020.
The idea is to set up an AMC, which in partnership with an ARC would take over NPAs from banks. The AMC would then manage the assets, and help turn them around for the recovery.  The AMC is expected to see participation from public and private investors, and firms specializing in turning around sick companies. The Indian Banks Association (IBA) had submitted a similar Bad Bank proposal to the government in March last year.
Speaking to Network18 about the proposed ARC announced in the Union Budget, Finance Minister Nirmala Sitharaman said, “It will have some participation from the government, but largely it will be the Indian Banks' Association (IBA) itself doing it. So that holding company would then spruce up the accounts, understand where the asset valuation is…So this is a workable solution that we are bringing in, the banks are all on board. We have had extensive consultation with them and with the Reserve Bank of India. So there will be a proper institutional framework through which this will happen in an absolutely transparent way.”
With the government not announcing any budgetary support, banks will chip in with the required equity, said a senior banking sector executive involved in the process. The ARC will work with the existing 15:85 structure, where 15 percent of the net value of the asset is paid for upfront, and the balance 85 percent is issued to banks in the form of Security Receipts (SRs), explained the executive.
“These are largely old, legacy accounts which have not been resolved. Some are also pending in courts for approval. These can all be transferred to the ARC, since banks have already provided at least 50-80 percent for these assets already,” the person quoted above added.
The transfer value of the stressed assets of banks, to be housed in the ARC is estimated around Rs 70,000 crore, net of provisions, said the officials. Given that the ARC has to provide 15 percent upfront as per the 15:85 structure, the minimum capital requirement to house Rs 70,000 crores of bad loans works out to about Rs 10,500 crores, said another official who did not wish to be quoted.
“ PSBs now have a provision coverage raio of around 86 per cent (up from 62 per cent in FY18). This implies that the PSBs would have provided for most of the bad assets and a wholesale transfer of the bad assets to the bad bank is just a technical issue,” SBI said in a research note today.
“The AMC led resolution approach would apply to large accounts with exposure spread across multiple banks and with a potential for a turnaround of stressed assets,” Dinesh Khara, Chairman of SBI said.
“Resolution in certain stressed assets, as for example Power and Road, changes in Government policies are required and these can be most effectively achieved by having a single window for both discussions with the Government and communication of the decision by the Government,” SBI said.
Benefits of the AMC/AIF structure include a renewed focus on the long-term core operations of a good bank without the distraction of troubled assets, the SBI report said. Also, removing troubled assets will relieve pressure on capital, enabling the institution to engage in more profitable and growth-oriented business activities including lending. Finally, removing troubled assets from the balance sheet would have a positive impact on the view of credit rating agencies, investors and potential investors, lenders, depositors and borrowers, the report added.
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