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Business News/ Industry / Banking/  Banks to exit ARCs as they set up ‘bad bank’

Banks to exit ARCs as they set up ‘bad bank’

Lenders try to free up capital ahead of the launch of NARCL

Banks to exit ARCs as they set up ‘bad bank’ (Photo: Mint)Premium
Banks to exit ARCs as they set up ‘bad bank’ (Photo: Mint)

Lenders have started looking for buyers for their stakes in asset reconstruction companies (ARCs) to free up capital for the launch of the National Asset Reconstruction Co. Ltd (NARCL), the ‘bad bank’ they will jointly own.

In February, state-run Punjab National Bank (PNB) put its entire 10.01% stake in Arcil, one of India’s oldest ARCs with assets worth 12,000 crore under management, for sale.

This was followed by private lender IDBI Bank, which, too, has begun looking for a buyer to sell its 19.18% stake in Arcil.

Similar talks are underway to divest ownership in ASREC (India) Ltd, a Mumbai-based ARC. On Thursday, three public sector banks—Union Bank of India, Indian Bank and Bank of India—said they jointly intend to sell up to 88.4 million shares, constituting up to 90.31% of the total equity share capital of ASREC.

Pooling funds
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Pooling funds

SBI Capital Markets Ltd (SBI Caps) has been mandated as the sell-side adviser for the transaction. It has stipulated that a potential bidder “should have a net worth of not less than 100 crore or should have assets under management of not less than 500 crore".

Experts said the move by lenders is in keeping with their investment plans in NARCL, which is expected to assume a much wider role in the cleanup of bad assets in the banking system.

According to RBI data, 7.5% of all bank loans had turned bad by the end of March 2021.

“With NARCL coming into being, the major positive feature is that it will not face the problem of aggregating debt, a problem that ARCs have been facing for a long time. Now, they will be able to do debt recasts as there will be no other lender who will have contradictory views. As an asset reconstruction company, we face such problems because 100% debt aggregation is not taking place," Pallav Mohapatra, chief executive of Asset Reconstruction Co. (India) Ltd and former head of Central Bank of India, said in a recent interview.

A clutch of lenders, including Punjab National Bank and Canara Bank, will own stakes in NARCL.

As announced by the government, NARCL will house bad loan accounts of 500 crore and above.

Mint reported on 12 July that NARCL, or the so-called bad bank, has been registered in Mumbai with a paid-up capital of 74.6 crore, citing filings with the Registrar of Companies (RoC).

The bad bank will be headed by Padmakumar Madhavan Nair, a stressed assets expert from State Bank of India (SBI), as managing director.

The setting up of NARCL is part of the government’s efforts to clean up the financial system, which is sitting on one of the biggest piles of bad assets in the world.

It is expected that the warehousing of bad loans by NARCL will allow banks to cut losses and renew lending.

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Shayan Ghosh
Shayan Ghosh is a national editor at Mint reporting on traditional banks and shadow banks. He has over 12 years of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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Published: 19 Jul 2021, 12:31 AM IST
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