Roadblocks frustrating mandate of ARCs

Reports suggest that asset reconstruction companies (ARCs) purchased non-performing assets (NPA) valued at around Rs 5,000 crore in the most recent July-September quarter. Compared to the previous April-June quarter purchases of ARCs, which market experts have put in the ballpark range of around Rs 7,000 crore, the total amount of NPAs brought this year have been down by around 28 per cent, a sizable dent but not one that cannot be overcome. In the last FY, ARCs bought NPAs worth Rs 35,000 crore, surpassing their FY16 purchases by about 75 per cent. Chances are that the rather lukewarm purchases by the ARCs this year could see a rise given that banks tend to press the pedal on these sales in the second half of the financial year. 

However, irrespective of the sales figures that will be thrown up by the end of the year, the government could help ease pressure on banks’ balance sheets by introducing several structural reforms that have been nothing less than a roadblock to an expedited disposal of NPAs. 

But first, a little bit of context. The SARFAESI or the Securitisation and Reconsturction of Financial Assets and Enforcement of Security Interest Act, passed by Parliament in 2002, provides for the establishment for ARCs. As of this day, around 19 ARCs operate in India that can purchase  secured assets from banks by paying in cash or issuing debentures, bonds or any other form of security. 

Banks follow a practice of putting up the NPAs for auction, after stating their reserve prices, and then proceed to sell it to the highest bidder. ARCs do not foot the entire acquisition cost upfront and instead issue security receipts.

This dynamic changed way back in 2006 when the Reserve Bank of India mandated that ARCs will have put in a minimum of 5 per cent in each segment of SRs, essentially ensuring that ARCs have some skin in the game. In 2014, the cash requirement as part of the SRs was increased to 15 per cent dealing another body blow to the possibility of a fast recovery from the seemingly interminable NPA crisis. The FY17 union budget did throw up some relief when it said that non-institutional investors would be allowed to invest in SRs, but till date there has been no action on that front. 

Meanwhile, the pile of toxic loans on the balance sheets of both public and private sector banks is mounting; some estimates suggest that it has already entered the territory of around Rs 9.5 lakh crore. In such a dire situation, the focus should have been on moving these bad loans from the books of PSBs. Instead, a fastidious government’s inaction on bringing down the cash component in SRs has meant that negotiations between banks and ARCs on the selling price are not just lengthening, but many transactions are also being killed midway. 

Many ARCs, to accommodate the cash requirement, have started pricing the NPAs at lower rates leading to bank officials backing out from the deals. If the government acts fast, it could possibly bring in a revival in sale of NPAs. If it does not, it will be business as usual, albeit at a snail’s pace and at even lower volumes.