Money & Banking

ARCs hope for level-playing field

KR Srivats New Delhi | Updated on February 08, 2021

Asset reconstruction companies (ARCs) – the 29 existing ones – are pinning hopes that they would get a level-playing field with the to-be-formed National Asset Reconstruction Company announced in the recent Budget.

They feel there should not be differentiated regulations for the two sets of ARCs, said sources in the industry.

Hybrid model

While the government is not going to put in equity in the newly-announced ARC, there is now talk of government giving a guarantee, which has led to concerns among existing ARC players. The way things are moving – it looks like the final ARC that will be set up on the ground will neither be bank-led nor government-led. It is more likely to be a hybrid model, where the government is expected to chip in with its support in terms of guarantees, said industry observers.

Finance Minister Nirmala Sitharaman had, on Sunday (post an industry event in Mumbai), told mediapersons that the government may have to give some guarantees for the National ARC.

In the absence of guidelines on how the Budget-announced mechanism will work, there is still no clarity on whether the government will give out guarantee on the Securitised Receipts or any debt raised by National ARC. There are concerns among existing ARCs – mostly private sector based ones – as to whether public sector banks will be given relaxations or benefits on provisioning if they transfer the bad debt in their books to the National ARC.

There are still several loose ends before bad bank can take off, said sources in the banking industry. For instance, there is no clarity on how will the transactions be treated in cases where the net book value in books of a PSB becomes zero (written off accounts or post 100 per cent provisioning for any account). Will the bank as an organisation be ready to transfer that account to an ARC at ‘0’ value if net book value is prescribed as the metric for valuation, industry sources wondered.

Also when the asset is eventually realised by the National ARC, there is still an unanswered question on who will bear the capital losses, if any.

ARC are not worried about competition with a new player joining the fray. They only wish rules are same for all. Today, in the absence of guidelines from the government on how the new mechanism announced in Budget will work, things have turned out into the famous story of ‘a group of blind men and the elephant’, with every stakeholder drawing his own conclusion on how the new mechanism will eventually work to solve the country’s bad loan mess in banking system, an industry veteran quipped.

On its part, the Reserve Bank of India is not in a position to put forth its specific views as no specific proposal has reached it post the budget announcement, sources said. However, the central bank has expressed its readiness to examine any such proposal.

Published on February 08, 2021

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