Bad bank idea: government guarantee for ARC paper likely


TO ENSURE THAT the ‘bad bank‘Once the mechanism proposed in the budget takes effect, the Treasury Department plans to provide a guarantee on the securities receipts to be issued by the Asset Reconstruction Company (ARC) to banks against the value of their acquired distressed assets.

The ARC is likely to take over Rs.2.5 million to Rs.2.5 million in stressed assets that remain unresolved in around 70 large accounts, according to government officials. Stressed credit accounts of more than Rs 500 billion each are expected to be released.

“Even if the government will not contribute equity to the proposed ARC, the government will guarantee the success of this structure,” said a senior government official. The proposed ARC will provide banks with 15 percent cash and 85 percent security receipts against the value of bad assets taken over by the banks.

The ARC is established by state and private banks and there will be no government involvement. It will have an Asset Management Company (AMC) to manage and sell bad assets.

For the banks, it will be a cash-neutral type of exercise because for the capital they put into the ARC, part of it will be returned as cash and left as a security receipt against the transfer of the stressed assets, a source said.

“For security receipts, the regulator is asking for some kind of reserve, for which the banks ask the government for a guarantee that the RBI (Reserve Bank of India) requires. For the 85 percent SR share, the banks need a provision of around 15 percent. Banks are demanding a state guarantee for this, which we will provide in the future. We will give government support to support the banks, ”said the official.

If the government guarantees the securities receipts issued by the ARC, banks will be able to transfer stressed assets to the proposed company without having to make additional provisions. The RBI’s 2016 guidelines require banks to set aside provisions for assets assigned to ARCs.

Of the existing ARCs, only 3-4 are adequately capitalized while more than a dozen are sparsely capitalized, requiring the construction of a new structure for the urgent resolution of strained assets. The transfer of stressed assets to the ARC is at net book value, which is the value of the assets minus the provisions made by banks for those assets. This structure will reduce the stress on the bank’s balance sheet from stressed assets and try to resolve bad debts in a market-oriented manner.

With most banks expected to be on board this company, faster processing is expected. Since most commercial loans are issued by a group of 8-10 banks, under the existing resolution mechanism, some banks usually refuse to process due to differences that slowed the process of processing. The proposed structure is intended to solve this.


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