5 Weak Banks Plan Asset Reconstruction Firm

Five weak public sector banks (PSBs) -- Indian Bank, United Bank of India, Dena Bank, Uco Bank and Allahabad Bank -- are likely to float an asset reconstruction company (ARC) to recoup bad loans.

The blue print for the ARC, in which all the five banks will have proportionate stakes, will be drawn up by the end of this month.

Since the banks are required to transfer the sticky assets to the ARC, the operations will be started in Maharashtra and Karnataka, which have lowest stamp duties -- transfer of assets to an ARC attracts stamp duty.

Bankers said the ARC would have two components: asset reconstruction fund (ARF) and asset management company (AMC), each with an average life of 7 years.

The ARC will be set up soon without any legislative amendments as state governments are not willing to pare stamp duities.

Since it will be a profit-oriented operation, the main aim of the ARC would be recovering more than the price paid for the assets.

The ARF will buy the impaired loans from the weak banks at a discount. Then it will issue special bonds to the 5 banks. The bonds, which will be guaranteed by the government, will have initial lock-in period of 2 years and a suitable rate of interest. The management of the ARF will be entrusted to the AMC.

With the NPAs of the commercial banks bloating to Rs 56,000 crore, the finance minister, at his meeting with the bankers on Monday, has asked the chiefs of public sector banks to personally monitor non-performing assets (NPAs) of Rs 5 crore and above.

These NPAs, which have remained in their books for several years, in some cases running into decades, have been identified as a big handicap for their revival.

The finance minister has also suggested that the quickest and the most effective way of removing the NPAs from the books is to move these out to a separate agency (ARC), which will buy these loans from the banks and makes concentrated efforts for their recovery.