The new ARC will have the advantage that loan exposures will be spread across banks, although this too is subject to challenges.
Lenders, backed by the government, could approach the Reserve Bank of India (RBI) for relief from the provisioning of assets sold to the proposed Asset Recovery Committee (ARC). They are expected to request a relaxation of the September 1, 2016 circular which requires them to provision an asset, allocated to ARCs, as if it were still on their books. In addition, they are likely to ask the CRA to be exempted from setting up future provisions for the assets it buys.
Experts observed that since banks already hold a fairly high level of provisions, incentives were needed to push banks to sell loans through a 15:85 model. The model implies that sellers receive 15% in the form of upfront cash payments and security receipts (SR) for the remaining 85% of the value.
If these exemptions are granted, it will give the new institution an advantage over existing players, the experts said.
Finance Minister Nirmala Sitharaman said in her budget speech on Monday that an ARC would be set up to help banks manage bad loans and later clarified that the government would not fund it. However, Financial Services Secretary Debasish Panda hinted that provisioning relief would be offered through a government guarantee. Panda told reporters on Tuesday that sales to the new ARC would be a cash-neutral transaction for banks. Since the regulator can insist on provisioning to support this arrangement, banks can ask the government for a guarantee that could satisfy the regulator, Panda said.
The RBI’s September 2016 circular provided that from April 2018, banks should continue to supply the loans sold as if they were still on the books. The rule applied if the SRs received on the sale represented more than 10% of the bank’s bad debts. As a result, hybrid cash and SR deals dried up and banks offered bad loans to CRAs almost exclusively on an all-cash basis.
The new ARC will have the advantage that loan exposures will be spread across banks, although this too is subject to challenges. Industry executives FE spoke to said banks held different levels of provisions for the same asset and that would complicate the process. A senior distressed asset market executive thinks private banks might not want to transfer the asset at book value. Implementation issues aside, he pointed out that no lender would want to make additional provisions if the asset were to be transferred into a 15:85 structure.
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