CREATING A BIG ARC – WILL BE BACK BREAKING!

By Ruma Dubey

Already, the Govt does not know how to deal with a situation where no one wants to buy the national carrier, Air India. And yet, it is looking at the option of setting up one more massive unit – an Asset Reconstruction Company (ARC). This will be just like the BIG BAD BANK.

The concept of the Govt is really very simple, obviously borrowed from developed countries which have such Bad Banks. There will be this bank which will buy up all the Non Performing Assets (NPAs) of all the 28 Public Sector banks (PSBs). The PSBs, instead of writing them off, sells it to this bank, obviously at a discount and shows the profit or loss earned in the balance sheet. For the PSB, that NPA gets over the moment it sells it to the bank. The NPA buying bank will pay some money and balance might be given in the form of securities as and when it manages to sell the distressed asset.

This is broadly the concept of this BIG ARC.. It is “bad” because it will be buying the bad loans. This concept began in 1988 in USA (where else!) and Melon Bank was the first to use this strategy. It held $1.4 billion of bad loans and it was dissolved in 1995. Such a Bad bank exists in UK – UK Asset Resolution, AMCON in Nigeria, National Asset Management Company in Ireland, SAREB in Spain, OHY Arsenal in Finland and Retrivia & Securum in Sweden.

Before we run down this BIG idea, let’s look at the possible advantages.

• PSBs will have cleaner balance sheets as all the bad will get transferred to this ARC
• PSB CMDs will be relieved of the onerous task of credit recovery and this new bank can do the job better as it has no relationship with the said CEO of the defaulting company.
• PSBs can concentrate on growth and shift focus from recovering credit.
• Banks get de-risked and they can become healthy enough to recapitalize themselves.

Well, now a look at the possible de-merits.

• This big ARC is basically transferring bad loans from 28 banks to one single bank – the NPA problem does not vanish; it just gets concentrated into one bank.
• The bank will take over only the big NPAs and of core sectors like infra and basic metals, which top the NPA list. But here itself, each company would have a debt averaging some Rs.15,000 to Rs.20,000 crore. Can you imagine how much NPA this bank will have to take over?
• Where will the huge capital required to set up such bank, which will need very deep pockets to buy NPAs, at least to the tune of Rs.70,000 crore, come from? Indradhanush itself had Rs.75,000 crore and spread over four fiscals.
• If Govt owns majority stake, where is the autonomy? The case will be exactly what PSBs are currently going through.
• Setting up a BIG ARC is complex and expensive because it requires setting up a separate organization, equipped with a skilled management team, IT systems and a regulatory compliance set-up.
• The big problem – how do these banks value the assets and how do they arrive at a pricing mechanism for buying the NPAs?
• Will the ARC sell the NPAs that it buys to investors – FIIs and others at a huge haircut? And to make them look attractive, will the Govt stand as a guarantor?
• Devising a transparent method, free from crony capitalism and conflict of interest, for identifying such projects will be a key challenge in the design of a bad bank.

The thing is there are already some 24 ARCs in the market, with Eldelweiss leading, followed by JM Financial and ARCIL which is the first and oldest ARC company of India. Foreign funds are also smelling blood given the massive NPAs abound; this probably explains why the Govt wants a share of the pie, a pie which it has itself baked, so why let others enjoy, right? Transparency and level playing field are a must – can this ARC qualify on these counts?

Even if this big ARC takes off, it will be just a temporary fix as the PSBs will continue to pile up new bad debt as their way of functioning, lack of autonomy, political interference; all will remain same. The aim should be to address the root cause and that is something which this big ARC will not resolve.