Cheers to the bourses

Pradeep Rane
14 July 2002

The Indian banking industry has been dogged by non-performing assets (NPAs). The banks NPAs stand at Rs 63,963 and that of financial institutions (FIs) are of Rs 16,611 crore. But due to absence of a proper legal structure, banks were not able to recover these funds from corporate and other defaulters.

The government promulgated the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance (Sarfaesi). As per the ordinance the government seeks to take a three-pronged approach for recovering NPAs. These include: securitisation of assets, setting up of asset reconstruction companies and enforcement of security. By this, the banks and FIs will be empowered to go out and claim dues from defaulters.

The banks can henceforth securitise assets, which means they can issue bonds against the security of underlying assets, thereby unlocking funds presently locked up for the period of the loan. They can set up asset reconstruction companies (ARCs) to take over their NPAs at an appropriate price, relieving them of the hassle of carrying worthless assets on their balance sheets. Moreover, they will have the power to seize and sell assets held as collateral, making loan recovery.

All hurdles in the way to recover sticky loans like legal delays from the Board for Industrial and Financial Reconstruction (BIFC) have been removed. Under the ordinance, once an asset is transferred to an ARC, no reference can be made to BIFR, which was used corporates and other wilful defaulters from staying away from paying loans taken from banks and institutions.

The government has also spelt out the structure of the government-sponsored ARC. It is called Asset Reconstruction Company (India) (ARCIL). In this ARC, the government of India will hold 49 per cent indirectly, and IDBI and State Bank of India will each hold 24.5 per cent. Private players will account for 51 per cent, and ICICI Bank will hold the majority of 24.5 per cent. Of the remaining 26.5 per cent, HDFC Bank will hold 10 per cent, and IDBI Bank and UTI Bank the rest.

In addition, ARCIL will create a market for securitised debt. Economic affairs secretary C M Vasudev says: ARCIL will come under the regulatory ambit of the Reserve Bank of India. It will also comply with Securities and Exchange Board of India norms while issuing securities to the banks and FIs in exchange of assets. The proposed structure of ARC will be that of a services company (in contrast to an asset-based company), helping it to operate with a capital of just Rs 10 crore. ARCIL is expected to help the banks reduce their NPAs that stand at in excess of Rs 1,10,000 crore.