Highly-placed sources in the finance ministry said that a mechanism would be developed under which the three banks would be able to sell their NPAs to the ARC and the proceeds would be invested in the government bonds.

The Government bonds would be redeemed gradually with the ARC getting back the funds blocked in the non-performing assets. The ARC, on its part would approach the debt recovery tribunals (DTRs) in respective areas to recover partly or fully the locked bank funds.

Sources said although the final shape to the proposal would be given after the receipt of the MS Verma committee report, the Government was intending to use the mechanism of ARC for infusing capital into the weak banks.

The Verma committee which was appointed to look into the problems of weakbanks and suggest measures for revitalising them, was likely to submit its report by the end of month.

The shape of the ARC, its funding mechanism and composition, sources said, would be decided after the receipt of the Verma panel report. It might be recalled that although the Narasimham committee on reforms in the banking sector had suggested setting of the ARC, the idea did not found favour with the government because of various reasons.

The main problem of the three weak public sector banks, the sources, said was the high non-performing assets. The NPAs, it was pointed out, had continued to accumulate and the efforts of the management to camouflage the real balance sheets to show better results, further aggravated the probelms.

On the other hand, it was felt that had the management taken a realistic view of the problem and adopted prudent measures, the deterioration in the balance sheets would not have come to such a pass.

The sources added that the three weak banks, after getting rid of thenon-performing assets by selling them to the ARC, would be able to cleanse their balance sheets and re-start work on virtually a clean slate. However, they added, Uco Bank, United Bank and Indian Bank, would be required to significantly streamline their operations and restructure themselves before being allowed to get rid of the NPAs.

Also since the focus would be on them for at least some time, the functioning of these banks would be closely monitored by the Reserve Bank and the finance ministry.

The ministry, however, has ruled out ARCs for other banks in the near future. Officials pointed out that basically NPAs were the problems of individual bank and owed its origin to the decisions taken by that particular banks. Hence, every bank should deal with its own problem.

However, since the problems of NPAs in Indian Bank, United Bank and Uco Bank have become so acute that it had become impossible for the individual banks to tackle them. This deterioration of problem was prompting the finance ministry tothink of ARC on a "pilot basis" with specific purpose to reviving the three weak public sector banks.