The recent sale of sticky assets by Asset Reconstruction Company Ltd (Arcil) to Deutsche Bank makes one wonder. What is it that the German bank found viable that the banks to whom the non-performing assets (NPAs) originally belonged, found worth giving up? The Rs 4,000-crore deal comprises a bundle of NPAs surrendered by ICICI Bank and a clutch of public sector banks like State Bank of India, Punjab National Bank and Bank of Baroda. Was it not Arcil?s mandate to retrieve what can be retrieved from Indian NPAs? Arcil, whose major stakeholders are ICICI Bank with 19.58% and SBI and IDBI Bank with 19.85% each, was primarily formed to address the burden of NPAs the Indian banking sector was saddled with. So, too, was the case with the UTI-promoted asset reconstruction company, Asrec, which was created subsequently in 2002. In all, the idea was to have a viable market for dodgy assets, with specialists involved in the salvage operations. Are we any closer to any such market?
While Arcil?s offloading of bad assets unto Deutsche Bank might seem to confirm the suspicion that Indian asset reconstruction units simply do not have the capacity to get assets back into shape (most NPAs of PSBs, say insiders, can be brought back to performance grade), there is reason to believe that there was wisdom in the sale. The public sector must always act with a greater measure of accountability towards an assortment of wider stakeholders, which makes it difficult to operate as a private sector entity would when faced with badly performing loans. Also, there is always the Central Vigilance Commission hovering in the background, which, given the manner in which various forces come into play, can possible pose a deterrent to the project of recoveries. Deutsche Bank, on the other hand, might possibly have spied some value to be extracted from underlying fixed assets like land and building, or may even have found a bargain trading opportunity in rebundling these NPAs and reselling them. If that happens, and a stronger market develops for NPAs, so much the better. The longer-term worry is the moral hazard that such a market might invite; public sector bankers, always under pressure to sanction loans with dubious repayment prospects, may see an escape route in such a market. They should be made more accountable.