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.
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.
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.
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
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
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
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
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.
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
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.
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.