The Hindu Business Line : ARCIL proposal to RBI — Allow banks to amortise NPA sale provisioning

THE Asset Reconstruction Company of India Ltd (ARCIL) is pushing the Reserve Bank of India to give incentives to banks that sell bad assets to asset reconstruction companies. ARCIL's recommendation to amortise additional provisioning on sale of assets to asset reconstruction companies is expected to specifically help the relatively weaker banks and financial institutions.

"We have requested that banks and FIs be given an incentive by way of a one-time window to amortise provisioning while selling bad loans to asset reconstruction companies (ARCs). Not all banks / FIs will be able to take the knock of additional provisioning mandated on sale to ARCs in a single year. Banks should be allowed to make the provisions over a three year period," said Mr Rajendra Kakker, MD & CEO, ARCIL.

ARCIL has already sent a written suggestion to the central bank in this regard and is awaiting a response.

The recommendation, if implemented, is expected to greatly benefit debt-ridden institutions such as IFCI, IDBI and Global Trust Bank. While IDBI has sold several hundred crore of bad assets to ARCIL, IFCI has just received board approval for the same. Global Trust Bank, although starved of capital, reportedly has plans to sell as much as Rs 500 crore to ARCIL.

An amortisation of provisions will make the process easier for the private bank with its capital adequacy nil, said an analyst.

ARCIL has suggested to RBI that a window be opened up on a temporary basis through which banks / FIs can carry out provision over a three-year period as against the current mandatory norm that the entire provisioning be carried out in the year of asset sales itself.

The provisioning needs for banks to conduct asset sales to an ARC works like this: Say, a bank has a bad outstanding loan of Rs 100. Ithas provided for Rs 50 and desires to sell the loan to an ARC - if the ARC offers a price of Rs 20 for the loan, then the bank, as per current norms, is to provision for the additional Rs 30 in the same year as that of the asset sale.

The new proposal suggests that the provisioning be spread over three years (i.e., to provide at the rate of Rs 10 every year for three years) to reduce the dent it creates in the bank's profitability.

Bankers say the move will certainly help the weaker institutions, which do not have strong balance sheets or hefty profits.