Banks use ARCs for ever-greening: Parliamentary Committee on Finance

Calls for encouraging banks to bring down their leverage, says present "grim situation" should not be used as an alibi for bank privatisation

The Standing Committee on Finance chaired by Lok Sabha member Jayant Sinha observed that banks park their stressed assets with asset reconstruction companies (ARC) to hide the actual extent of bad debts and this should not be encouraged.

At the same time, banks should be encouraged to bring down their leverage and the present “grim situation” should not be used as an alibi for bank privatisation.

“The ARCs have become an instrument to park the non-performing assets (NPA) of banks as simply a window-dressing exercise. The committee would therefore recommend that this policy should not be misused in such a manner, as it does not really serve the purpose of resolving NPAs,” the committee said.

At the same time, the committee also urged the government to “focus their endeavour to speed up the establishment of the Asset Reconstruction Company and Asset Management Company, which was announced in the 2021-22 Union Budget, to consolidate and take over the existing stressed debt and manage and dispose of the assets to Alternative Investment funds etc.”

However, the Standing Committee was satisfied with the “coherent policy response” by the government in resolving the bad assets problems in banks. The committee was told by the government that gross NPAs have come down from Rs 8.96 trillion in March 2018 to Rs 5.77 trillion in December 2020. There was a record recovery of Rs 2.27 trillion during this period  and asset quality as a percentage of lending improved from 7.97 per cent of net NPA (bad debts after provisioning) to 2.32 per cent. At the same time, because of capitalisation in government owned banks, capital adequacy ratio improved from 11.66 per cent in March 2018 to 13.74 per cent in December, 2020.

The government infused Rs 3.17 trillion in banks, while the lenders mobilised over Rs 2.49 trillion themselves. As a result, provision coverage ratio in banks improved to 87.5 per cent in December 2020, from 62.7 per cent in March 2018, reflecting increased resilience, the committee noted.

The committee noted that despite several steps taken by the government to nurse back health of the public sector banks after the asset quality review of the Reserve Bank of India (RBI), “the large legacy NPAs remaining unresolved/unsettled cannot be ignored.”

The committee reiterated that large legacy NPAs must be segregated for resolution, allowing banks to move ahead with their regular business “without getting bogged/dragged down with legacy issues.”

The committee, however, was critical about high write-offs and leverage in banks particularly in public sector banks. It said 16 large and mid-sized public sector banks wrote off more than Rs 31,000 crore in the June quarter of 2018-19, an increase of 37 per cent year on year, whereas, the loan books grew only 4.5 per cent in that period.

“Although the situation is no doubt grim, the committee would remain optimistic that as most of the large legacy NPAs get resolved/settled either through the Insolvency and Bankruptcy Code (IBC) process or outside it, the consequential recoveries/write-ins will help the banks shore up their balance sheets.”

“The need of the hour for the banking sector is to look ahead and progress with vigour and vitality,” it said, adding, both the government and regulator RBI should formulate coherent policies to overcome the present challenges and chalk out their growth path with confidence. While doing so, special focus should be given on challenges emerging from the Covid-19 pandemic.

However, the challenges should not be an excuse for privatisation of banks, it said.

“In this connection, the committee would like to emphasise that the present crisis which the committee believe is transient, should not become an alibi for privatisation of PSBs”