The ARC-AMC model of bad debt resolution announced in the Budget by Finance Minister Nirmala Sitharaman will not be backed by government equity and will have to be set up by the banks themselves, Banking and Financial Services Secretary Debasish Panda said on Tuesday.
The Budget announced setting up of asset reconstruction companies (ARCs) and asset management companies (AMCs) to resolve stressed assets problem in the banking sector.
"This ARC-AMC entity will be set up by the banks. There will be no government equity in the entity," Panda said. This essentially means that there will be ARCs and AMCs at bank level to deal with bad debt.
Explaining the modalities of the resolution via ARC-AMC, Panda said, "Banks will transfer these assets to the ARCs at net book value. Net book value is the value of the asset minus provisioning already done. In some of the projects, 100 per cent provisioning has been done, while in some other projects 80-90 per cent provisioning has been done. So, it is not so much the issue of provisioning but getting the money out of these assets as with passage of time there will be erosion in the value of these projects and there will be no buyer. So that is the urgency."
"The asset then goes to the AMCs where dedicated professionals will resolve the asset. They will operate the asset for some time or find a suitable investor or an AIF," the Secretary added. This will free up the banks to take care of their lending business while the assets will be taken care of by the professionals having experience in dealing with bad asset management.
Being asked about the capital that the banks will have to deploy for the ARC-AMC mechanism, Panda said, "The deal happens based on the net book value. It will be a 15 per cent cash deal and 85 per cent by way of securitised receipts."
"For the banks, this will be a cash neutral deal. The money that they are putting comes back to them. The regulator may require some kind of provisioning there for which the banks may request the government to give some kind of guarantee to satisfy the regulator, which the government will look into at that stage," Panda added.
Ahead of the Union Budget, the Reserve Bank of India (RBI) had flagged concerns on the growing non-performing assets in the banking sector.
The banking regulator warned in the Financial Stability Report that gross non-performing assets (NPAs) in the banking sector could rise to 13.5 per cent in September 2021 against 7.5 per cent in September 2020. The RBI said that under severe stress scenario, gross NPAs could balloon to 14.8 per cent by September 2021.