labels: institutions, unit trust of india, investment - general
Cheers to the bourses news
Pradeep Rane
14 July 2002
Mumbai: Over the last couple of weeks, bank stocks have witnessed a rally. What exactly is the reason for the banks finding favour with the bourses? The answer is not far to seek. Marketmen are pinning their hopes on the recent ordinance issued by the central government, which would enable banks to recover sticky loans on their books.

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.

ARCIL will perform a useful function by bringing 75 per cent of the debt-holders together and take management control of a defaulting company. It will then put the company up for an open auction. The proceeds of the auction will be passed on to the original debt-holders.

Says an analyst: Setting up an ARC has made a sort of optimism in the minds of market players, that the banking industry will be able to recover most of its sticky assets, which otherwise have to be written off. The banks now can improve their books with better recovery of funds from corporates.

Indian companies are for long borrowing funds from the banks and FIs and were not paying back these loans. Most of them time promoters of these companies divert funds to other shell companies, and in order to escape from asset recovery by the banks they seek refuge in BIFR or through court cases. If one sees the list of companies in the defaulters list it would read like the whos who of India Inc. In most of the cases, funds were allotted by the banks due to political pressure.

Whenever the government sought ways to improve NPA recovery, powerful industrial groups and corporate lobbies scuttled the move. The trend was even witnessed at last weeks meeting of the prime ministers council of industry and finance, where industrial associations opined that the ordinance is quite harsh.

They also demanded that the ordinance should be reviewed to take care of the borrowers rights. So Finance Minister Jaswant Singh assured them that the government will look into the issue. This is a classic case where corporates are trying to browbeat the government by staying away from paying their dues to the banks.

Unless the government strictly follows the spirit of the ordinance, the whole purpose of this legislation will serve no purpose. Worst, it can even cause further damage to the already-strained banks and FIs of India.

 

 

 search domain-b
  go
 
Cheers to the bourses