Banks to seek leeway from RBI for new ARC

Banks, especially public sector lenders, are planning to approach the Reserve Bank of India (RBI) to seek leeway in certain conditions for a new asset reconstruction company (ARC). The proposed ARC intends to take over bad loans of public sector banks (PSBS).

At present, the RBI mandates banks to seek bids from prospective investors for better price discovery. In the case of PSBS, which will move non-performing assets (NPAS) to the proposed ARC, it is a transfer of assets, not sale.

Besides, banks may have to make additional provisions when the ARC issues security receipts (SRS) when taking over assets. Banks will be issued SRS for 85 per cent value of assets; the balance 15 per cent will be given in cash.

Senior bankers said over 70 per cent provision for assets will be moved to the ARC. The ARC will also be owned by banks, which will transfer the assets. Banks will make a case before the RBI, seeking relaxation in provisioning for SRS, which will be a part of the investment book of banks.

The initial capital pegged at ~10,000 crore for the ARC will support the buying of toxic assets in excess of ~1 trillion. The total book value of assets eligible for transfer is about ~50,000 crore.

Besides ARC, an independent and professionally managed asset management company (AMC) will be set up to manage assets with a focus on turnaround. The AMC will set up alternative investment funds and solicit commitments from banks, as well as domestic and international investors.

Global rating agency Standard and Poor’s in a statement said to establish a ‘bad bank’ to manage lenders’ troubled assets and strengthening the National Company Law Tribunal framework could benefit banks inprinciple.

It will ensure the management bandwidth is not spent on recoveries from weak credits.