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Budget: ARC to fast-track PSB clean-up, initial capital pegged at Rs 10K cr

In their post-budget media interaction, finance ministry officials said banks will put in capital in the AMC, and the govt will give support, if required

Topics
Union Budget | Budget 2021 | PSBs

Abhijit Lele  |  Mumbai 

Bankers
Bankers said while the idea has been around for long, its execution within this financial year is important.

Efforts to clean up banks’ books got a further fillip with the move to set up an asset reconstruction company (ARC) and an allied structure to buy out and turn around stressed assets, particularly of public sector banks (PSBs).

An ARC, and asset management company (AMC) are to be set up to consolidate and take over the banks’ existing stressed debt. They would manage and dispose of the assets to Alternate Investment Funds (AIF) and other potential investors for eventual value realisation, finance minister Nirmala Sitharaman said.

Bankers said while the idea has been around for long, its execution within this financial year is important. “The proposed mechanism (ARC and AMC) means assets will not merely be parked, but there will be focus on their turnaround as well.” This is because the adverse effects of Covid-19 pandemic induced disruptions on banks’ asset quality have begun to raise their head.

The Reserve Bank of India’s (RBI’s) Financial Stability Report of December 2020 said that that banks’ gross non-performing assets may rise sharply to 13.5 per cent by September 2021, nearly double the 7.5 per cent in the same period of 2019-20; and escalate to 14.8 per cent under a severe stress scenario. And banks will have to brace for a rollback of regulatory forbearance announced in the wake of the pandemic, and enhance their capital positions. This is despite the provision coverage ratio (PCR) improving across all bank groups and rose to 72.4 per cent in September 2020 from 66.2 per cent in March 2020.

Sunil Mehta, chief executive officer (CEO) of the Indian Banks’ Association (IBA) said the initial capital pegged at Rs 10,000 crore for the ARC “will support the buying of bad loans in excess of Rs 1,00,000 crore”.

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In July 2018, the Sashakt panel had recommended formation of an independent AMC to acquire bad loans predominantly from -- large stressed exposures above Rs 500 crore with potential for turnaround.

In their post-budget media interaction, officials said banks will put in capital in the AMC, and the government will give support, if required. There are over 20 ARCs as on date, but few have critical mass of capital, and do not have the competency to take and manage complex big-ticket

Rajkiran Rai G, Chairman of IBA, and managing director and CEO of Union Bank of India said the move (forming ARC-AMC-AIF) will expedite the resolution of bad assets. Incidentally, the IBA had proposed the creation of a “bad bank” during the course of the pandemic.

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First Published: Mon, February 01 2021. 23:00 IST
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