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Gilts buyback blow to asset recast firm

Calcutta, June 28: ARC of India Limited, set up with much fanfare last year, seems to have lost its charm with public sector banks reluctant to transfer their distressed assets to the company.

Soon after the ARC was set up, the new finance minister Jaswant Singh announced in this year’s budget that the government would buy back the illiquid gilts lying with banks. The government realised that an amount of Rs 82,000 crore was stuck in 24 securities. It is planning to start the buyback process in July.

ARC of India Limited, the first asset reconstruction company in the country, was formed following Yaswant Sinha’s announcement in the Union Budget 2002-03. The company decided to start off with buying out Rs 5,000 crore worth of bad assets from the system.

ICICI, IDBI, and State bank of India hold 24.5 per cent each in the ARC which has an equity base of Rs 20 crore. HDFC and HDFC Bank hold 10 per cent each of the equity and the rest is held by a clutch of banks including Federal Bank and IDBI Bank.

However, banks are reluctant to part with their sticky assets at large discounts to the ARC. In some cases, the discount could be as high as 50 per cent depending on the quality of the underlying assets. Instead, they would prefer to recover the full amount along with the interest. These recoveries could be booked directly as income, which would boost their bottomline.

Once the bond buyback scheme, the banks do not need to transfer their distressed assets to the ARC. After the buyback, most banks would be in a position to complete their outstanding provisioning requirements.

The large banks would restrict their participation in the buyback programme only to the extent of tax benefits available under Section 36 of the Income-Tax Act.

Some of the banks have already made provisions for their NPA in the last few years. In fact for most of the public sector banks, the NPA coverage was in excess of 50 per cent and for a couple of them in excess of 60 per cent. Once the buyback is complete, these banks would be in a position to reach 100 per cent coverage of distressed assets. Consequently, the bankers say that there is no need for transfer of distressed assets to the ARC.

Most bankers intend to pursue recovery more vigorously, including invocation of guarantees and possession of physical asset cover. They feel only those assets where the underlying security is weak and the cost of recovery is high would be transferred to the ARC.

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