Budget 2021: New ARC To House Large Legacy Bad Loans

The asset reconstruction company being set up to aggregate stressed assets from banks will house legacy bad loans of over Rs 500 crore, according to government officials. The entity will be set-up within the next the next couple of months, they said.

“We are looking at assets of size more than Rs 500 crore. They are going to be legacy cases where provisioning has been more than 80% in most cases and in some cases, the banks have already made full provisioning,” Financial Services Secretary Debasish Panda said in a media interaction on Tuesday. The ARC will warehouse these stressed assets and transfer them to an asset management company, managed by a team of professionals, for sale.

Finance Minister Nirmala Sitharaman had said in her Budget speech on Monday that an ARC and an AMC would be set up to “clean-up the bank books.”

The government's role in the ARC remains unclear.

Panda said that setting up of the ARC would be “cash neutral” for the government. In comments on Monday, government officials suggested that banks will put in funds required to set up the ARC. However, it is then unclear as to whether this would be a government entity or just another private sector ARC like ARCIL which had been set up collectively by lenders.

“There is a lot of merit in it. Since it is being promoted by banks, they will have an inherent desire to dispose the assets in a time-bound manner. I am not saying this is a one-all solution, but this is one of the solutions which may help in resolution of larger legacy NPAs,” Panda said.

Panda suggested that the government may consider providing some comfort in the form of a guarantee but it remains unclear what shape and form this will take. “We are in touch with the regulator and will see how it happens,” the secretary said.

The new ARC, which will be adequately capitalised, will help in aggregation and faster resolution of bad debt, allowing banks to increase their lending capacity once the money gets ploughed back into the system, Panda said.

Development Finance Institution

The financial services secretary said that the DFI, to be known as the National Bank for Infrastructure Financing and Development, will be a sovereign-backed institution which will play a key role of development and financing through “innovative ways.” He said that the government will look to merge India Infrastructure Finance Company Ltd, a government-owned entity registered as an NBFC, with the new DFI.

“For a quick start, the IIFCL could be subsumed so that they have some domain expertise and they have a set of manpower who are in this kind of business,” Panda said.

The DFI will offer credit enhancement, securitisation, underwriting, among others, he said.

“It will be run by a team of high-qualified professionals and will act as a facilitator by helping in project functioning and financial closure. It will nurture the bond market for infrastructure financing. It will also bring in real time technology-based monitoring of projects through early-warning systems, use of drone cameras, artificial intelligence, etc,” the secretary said.

Panda said that a mechanism will be evolved for accessing funds by the new DFI at cheaper rates. The new law will have a dedicated chapter to facilitate setting up of private DFIs too.