Calcutta, Jan. 12: Armed with the new NPA ordinance, public sector banks are now reluctant to participate in the proposed asset reconstruction company (ARC). The ARC was proposed to take over all losses and doubtful loans of the banking sector.
Bankers said the change of heart was due to the government empowering financial institutions and banks to recover their dues from borrowers under the Securitisation and Asset Reconstruction Ordinance of 2002.
Only the State Bank of India has agreed to join the proposed ARC. The SBI, along with ICICI and IDBI has already decided to acquire 24.5 per cent each in the ARC. Others who will join the ARC are IDBI Bank, HDFC Bank and UTI Bank. The initial corpus of the company is Rs 10 crore.
Almost all the banks and FIs armed with the new ordinance have already issued notices to borrowers—corporate as well as non-corporate—with the implicit threat of assuming management control or encashing their physical asset cover, especially land and buildings.
“Most banks are not interested in the ARC now. Even our bank is not interested in joining it. We have enough powers under the securitisation ordinance to recover our dues,” said a top Allahabad Bank official.
This view is now being increasingly reflected by other public sector banks as well.
A senior Punjab National Bank official said, “We feel there is no need of joining the ARC at this point. We have enough powers to recover our bad debts.” This view has come about since most of the banks have already written down their capital or made large provisions out of their reserves.
For instance, Allahabad Bank alone has written down its equity from Rs 778 crore to Rs 246.70 crore after making large provisions for non-performing loans. Similarly, other public sector banks have also off part of their capital against such bad assets to clean up their balance sheets. Under this kind of a situation not many banks want to transfer the assets to the ARC.
This is because transfer to ARC would imply that the assets would have to be transferred at a hefty discount of 50 to 60 per cent. “This could lead to losses. This implies that they would be receiving only a portion of the advances,” said a senior official of United Bank of India. He added that “Where is the need to resort this measure when we can recover and make profits.”
Banks resistance to ARC also stems from the slow-down in credit offtake, which means lower interest income. Instead, banks currently have opted for recoveries bad loans through the provisions of ordinance.
Recoveries of bad assets would in turn be booked as income, banking sources said, adding this would push up their profits and further beef up their tier–I capital mostly through shoring up their reserves.
Banks are also hoping that in loans that are backed by collateral of land or buildings, assets could be sold to recover their dues.