Bankers cold-shoulder highways authority idea to set up specialised ARC

Written by Arun S | Timsy Jaipuria | New Delhi | Updated: Aug 26 2014, 06:33am hrs
Bankers have cold-shouldered the National Highways Authority of India's (NHAI) proposal to set up a specialised Asset Reconstruction Company (ARC) for revival of the road sector's stressed assets.

Indian Banks' Association (IBA), the apex body for banks, has expressed discomfort with the proposal, cleared last week by NHAI's board, which suggested that the highways authority will pick up a stake of 25% in the ARC, leaving the remaining to banks, financial institutions and even private companies.

IBA, sources said, would like NHAI to pick up at least 51% stake in the ARC-like entity. There is a disquiet among banks (regarding the ARC idea). IBA is not sure if the ARC is a good idea as it will mean banks have to take a haircut, something developers are supposed to do in the first place. Selling these assets is going to be difficult as no one is going to buy it at face-value, an official said. Two other officials involved in the discussions also confirmed to FE that IBA and its member banks were not keen on taking forward the ARC idea.

NHAI has to put their money where their mouth is and pick up a majority stake. The proposal for just a 25% stake shows NHAI itself is not confident about the ARC's ability to take off. It looks like they themselves know an ARC has no magic wand to make unviable projects viable and therefore only want to make it seem that they are doing something about the large mess in the sector, one of the officials said.

The other worry is the moral hazard of indirectly bailing out private promoters using public money. Sources said asking public sector banks (PSB) and financial institutions to pick up stakes in the ARC would amount to the Centre indirectly capitalising the entity, especially when it is finding it difficult to recapitalise PSBs due to fiscal constraints. Besides, existing ARCs themselves are struggling to survive.

Even after a nudge by the department of financial services (the nodal agency in the government for public sector banks and FIs), IBA has so far only agreed to discuss the ARC idea to see if it can be agreed to in-principle.

On the way forward, the sources said the proposal will now be discussed by the IBA when its management committee meets towards the end of September. Before that meeting different consortia of banks will hold separate meetings on the proposal and then give inputs to IBA. IBA will then take it up with NHAI.

According to NHAI, the current debt exposure of commercial banks to road sector borrowings is around R1.6 lakh crore, of which over a fifth is stuck in projects facing delays.

In July, NHAI had first proposed the ARC idea to NHAI. To buttress the proposal, it even said large pension funds are interested in infrastructure projects and indicated that revived projects can then be sold off to such funds.