Synopsis–The rider is to ensure that non-performing assets (NPAs) are not sold at inflated prices. Also, the government will offer a sovereign guarantee to security receipts (SR) issued by the ARC only when the asset is bought under a certain haircut band.
The government is expected to soon clear the proposed asset reconstruction company (ARC) that will take over stressed debt, though the promised sovereign support for the bad bank is likely to come with some riders.
The government will offer a sovereign guarantee to security receipts (SR) issued by the ARC only when the asset is bought under a certain haircut band.
“If the ARC buys an asset at, say, 80% of the book value, the government may not guarantee or only provide partial guarantee on issued SRs,” said a government official aware of deliberations. “We have received the proposal from Indian Banks’ Association (IBA) on the structure and other modalities of the proposed ARC. A final decision is expected soon.” He said the structure is yet to be finalised.
The rider is to ensure that non-performing assets (NPAs) are not sold at inflated prices.
Comfort for Banks
That may put the burden on the government.
The sovereign guarantee will give comfort to banks to sell assets to the ARC, helping them clean up the books and get on with the core business of lending.
In the first phase, 70-80 stressed assets worth Rs 500 crore and above will be taken over by the ARC, adding up to about Rs 3 lakh crore of bad loans. About 10 banks and two non-banking finance companies are expected to come together to set up the ARC.
Under the proposed model, the ARC will acquire NPAs at net book value, paying 15% consideration in cash and the remaining 85% in security receipts. These instruments are redeemed when the ARC successfully resolves the NPA.
A bank executive privy to discussions said that even at a conservative estimate, and considering a long-term repayment period, the guarantees on SRs could still be substantial. If an asset is taken at 30-40% of the book value, the burden on the government may be less in case the bad bank fails to realise the value, he added.
Finance minister Nirmala Sitharaman had announced setting up an ARC-asset management company model in her FY22 budget speech, to consolidate and take over existing stressed debt. “The government will probably have to provide a guarantee,” she had said at a post-budget conference in Mumbai.
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