BackFinance ministry takes stock of ways to tackle NPAs
Hasmukh Adhia says ARCs need to be strengthened to deal with rising NPAs in the system
Premium. Photo: Pradeep Gaur/Mint
Mumbai/New Delhi: The finance ministry is looking at various measures to strengthen asset reconstruction companies (ARCs) as it looks to deal with rising bad debts in the Indian banking sector.
Many measures were discussed to reduce non-performing assets and the problems faced by ARCs at a meeting held in New Delhi and attended by finance ministry officials, representatives of ARCs and the Reserve Bank of India (RBI).
“ARCs will play an important role in cleaning up the NPA (non-performing assets) mess. ARCs need to be strengthened to deal with rising NPAs in the system," said Hasmukh Adhia, secretary, department of financial services, in the ministry of finance. Adhia said actionable plans were charted out in the meeting for strengthening ARCs.
ARCs want a uniform procedure for reserve price calculation as the method of calculation varies across banks at present.
Lack of uniform pricing for bad loans has remained a major issue with ARCs that they have frequently raised with regulators and banks. While buying bad loans from banks, earlier ARCs had to contribute only 5% of the agreed sale price of the assets as security receipt to banks. Given the small equity contribution, the ARCs could then quickly recover their investment.
However, in August 2014, RBI said ARCs have to contribute at least 15% of the agreed sale price of bad loans to banks. This has severely strained ARCs as many of them face capital constraints. This is the reserve price calculation mechanism. Besides, recovering their investment takes longer and hence ARCs have demanded that banks bring down the sale price of bad loans.
ARCs also want stressed assets to be sold in a consolidated fashion rather than piecemeal in cases of consortium lending to get better valuations and recovery from stressed assets. ARCs have sought an increase in the single promoter investment limit beyond 49%. They are also concerned about regulations on trading of security receipts.
“The proposals indicated will help in resolution of NPAs faster by helping ARCs acquire more bad assets from banks. The main problem of ARCs remains pricing and how various banks calculate the final price. If it is made uniform across all banks, ARCs can plan better and it will go a long way in controlling the NPA problem," said P. Rudran, former chief executive of Arcil Ltd, the country’s largest asset reconstruction company. RBI will have to take a decision on most demands as ARCs are regulated by the central bank.
In a 19 May report, rating agency Crisil had warned that gross NPAs in the banking system are likely to increase to 4.5% by March 2016, from 4.3% in March 2015. “While credit growth should pick up from the lows of FY 2015, continued deterioration in the asset quality of banks and resultant risk aversion will remain a headwind in fiscal 2016. Growth in slippages are expected to decelerate in the current fiscal, but reported gross NPAs will still remain at elevated levels as some of the assets restructured in the previous 2-3 years, especially in the infrastructure, construction and textile sectors, degenerate into NPAs again," the report said.
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