Indian banks` ARC to start operations in 2 months

The company will be set up under the Securitisation Reconstruction of Finance and Enforcement of Security Interests Act (SRFESI Act).

The new company will have a capital base of around Rs 100 crore and 16 shareholders. Ten of the shareholders will be public sector banks, including Punjab National Bank, Syndicate Bank, Canara Bank, United Bank and Bank of Maharashtra, ISARC managing director and chief excutive officer P Rudran said.

The other six shareholders will consist of Small Industries Development Bank of India (SIDBI), SIDBI Venture Capital, two state financial corporations and APITCO.

The company did not elaborate on its business strategy and plans. The commencement of operations is subject to regulatory approval.

Most SME units turn sick or default on payments due to factors beyond the control of the entrepreneurs and management. They have limited capacity to withstand adverse shifts in the economic and business environment, compared to the large units, analysts said.

The SME units are also at the mercy of large companies and units for receiving timely payments. The lending to the SME sector has seen a sharp growth in the last three financial years. Some advances could turn bad (stop making repayments) due to sector-specific issues.

The total NPAs of the SME sector stood at Rs 5,845 crore as on March 31, 2007, whereas the bad loans of banks and financial institutions was Rs 64,724 crore during the same period.

The recoveries of SME's is a big challenge for the company and to meet the need it will open new branches.