PSBs may get nod to set up ARCs

Our Economic Bureau

New Delhi, Nov 20: In a reversal of its earlier thinking, the government may allow public sector banks (PSU) to set up asset reconstruction companies (ARCs) in order to cleanse their balance sheets of non-performing assets (NPAs).

In its first meeting here on Tuesday, the high-level group set up to study the formation of ARCs undertook a stock-taking exercise on the status of NPAs. It also considered the possibility of permitting public sector banks and financial institutions to set up one or more ARCs, against the earlier stand taken by the ministry that they should be kept out and the private sector alone allowed to participate, it is learnt.

The meeting was chaired by joint secretary in the banking division Shekhar Agarwal and was attended among others by representatives from the Reserve Bank, Bank of Baroda, United Bank and Uco Bank.
Despite preliminary feedback that some pilot ARCs may be set up first for the weaker banks, indications are that the strategy may encompass NPAs per se rather than targetting the weak banks first.
It was argued that the complexion of “so-called” weak banks had undergone a radical change, with Dena Bank now being the weakest with Rs 200-crore losses, while Indian Bank had managed a small operating profit and United and Uco Bank too had made net profits so far this year.

The group of officials was set up last week in a meeting with public sector chief executives called by finance minister Yashwant Sinha. It was decided then that it was not feasible to wait for Parliament to pass the ARC bill before acting on the concept. The group is to work out by the month-end a broad framework for ARCs within the existing laws so that pilot operations can be launched and lessons drawn from practical experience even as the legislation is put in place.

The finance ministry is toying with the idea of allowing ARCs to take over NPAs from banks against government-backed bonds, etc., so that banks can access capital markets with a clean slate. A number of them need to induct fresh capital in order to meet their capital adequacy norms, while the government is in no position to augment their equity base. A bill to allow reduction of its stake to below 33 per cent in PSU banks is already pending with the standing committee on finance.