Link capital infusion to banks' balance-sheet clean-up: Arcil chief

The government should ensure that the money being pumped into state-run banks, which have been saddled with the bad loan mess for years, must be used to clean up their balance-sheets, says the head of the oldest asset reconstruction company Arcil.

In August, the government had announced an upfront capital infusion of Rs 70,000 crore into public sector banks to help them meet the regulatory capital requirements as well as help oil the economy with increased lending. Since FY15, the government has infused Rs 2.5 lakh crore into state-run banks to help them improve their capital adequacy ratios and to meet growth capital needs.

"I believe that recapitalisation of banks to a certain extent, if it linked more towards a clean-up, would have served a better purpose as there is an urgency to clean up their books," Asset Reconstruction Company (Arcil) managing director Vinayak Bahuguna said here at a function.

The better thing would be making banks to sell NPAs before providing capital, he said, adding banks not selling NPAs to asset reconstruction companies is a concern.

"If banks don't sell, NPAs are going to sit on their books and will continue to lose value. So frankly, if you would have thought that 60-70 percent provision was enough, in two years even 80 percent would not be enough," he added.

However, he said recovery rates from bad loans have improved after the implementation of the bankruptcy code in 2016 and with better recoveries, the return on assets will also see some improvement going ahead, he added. He also warned that if the slowdown is not arrested fast, then it can impact the return on assets for ARCs.

"If the slowdown prolongs say over the next six quarters, it means that whatever you thought of the asset generating 2 or 3x the value invested, it will not happen. It will also cause a problem for us," Bahuguna added.