Letters: Functioning of ARCs

With reference to “How can ARCs help solve the banking crisis?” (April 17), the articulation of Ajay Shah on the functioning of asset reconstruction companies (ARCs) is ideal tough to make it practical. Banks will be too happy to receive cash in lieu of security receipts (SRs), rightly referred to by the author as pieces of paper, as they are hardly redeemed for cash. Banks will prefer cash even if it is lower in value. ARCs are commercial entities. Ultimately, they will have to realise the value from the tainted asset greater than the price it paid to remain in business. Moreover, the deep haircut will be difficult for banks to absorb in their books. In the process, if ARCs buy non-performing assets at near “trash value”, there is no scope for banks to write off the huge haircut, the portion of unpaid loans.

More than regulation, it is essential that an ecosystem is developed where the bad loan resolution is made quick enough before its intrinsic value further erodes so that ARCs begin to perceive buying of bad loans a worthy and sustainable business.

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