After the Reserve Bank of India (RBI) Governor Raghuram Rajan's all out attack on bad borrowers, which resulted in higher provisioning and losses in the books of banks especially PSU banks here comes the antidote from the Union Finance Minister Arun Jaitley. In his third budget under the BJP-led UPA Government, Jaitley has tried to strengthen the asset reconstruction companies (ARCs), whose business model is to restructure and recover bad loans.
Jaitley has opened the door for ARCs to strengthen their capital by hiking the sponsor's stake in ARCs from a maximum of 50 per cent to 100 per cent. The non -institutional investors (HNIs, retail and others) would be allowed to invest in security receipts (SR), which is paid as a consideration for buying bad assets from banks. This measure would develop the SR market as there is hardly any liquidity in SRs and most of the time banks(who sold the bad assets) end up holding it till the maturity.
HIGHLIGHTS:Union Budget 2016
Similarly, the proposal to amend SARFAESI to extend benefits to NBFCs with assets size of over Rs 500 crore as 'financial insitutions' will go a long way in not only encouraging NBFCs to lend to corporate sector, but also provide them a tool to invoke SARFAESI in case of a default. The SARFAESI Act provide sweeping powers to possess the assets of a defaulter to recover money. Currently, only banks and financial institutions are allowed to invoke SARFAESI.
Jaitley has also announced a proposal to provide complete pass through of income tax to securitization trusts including trusts of ARCs. " The income will be taxed in the hands of the investors instead of the trust," said Jaitley.
FULL COVERAGE:Union Budget 2016
While the proposal like bankruptcy code and strengthening of debt recovery tribunals (DRTs) are more longer term solutions, the proposals for ARCs will support the cash starved recovery companies. Today, Edelweiss ARC, promoted by Edelweiss Group, is the biggest player in term of AUM in the market. There are over a dozen players promoted by banks and non bank players. However, the ability of ARCs to buy bad loans is restricted due to capital. Jaitley 's relaxation would encourage large players like private equity, banks and institution to play the ARC game.
The bad loans in the system have already crossed over Rs 3.25 lakh crore. The gross BPAs of the top ten banks have swelled by a staggering Rs 70,000 crore, which actually matches the amount committed by government for capital infusion in the PSU banks in the next four years. Currently, ARCs were in a fix. One, the RBI had asked them to pay 15 per cent upfront as against 5 per cent earlier. Second, there were capital constraints as sponsor was not allowed to hold more than 50 per cent.