Moreover, since the ARC-AMC will be a private entity, the decision-making is expected to be swift, as its proposals need not be vetted by the 3Cs.
The proposed asset reconstruction company (ARC), or the so-called bad bank, will be different from the existing ones, as it will have greater financial muscle as well as professional capacity to work out large stressed assets, chief economic adviser Krishnamurthy V Subramanian told FE.
At present, barring 3-4, most of the ARCs are not adequately capitalised, Subramanian said in an interview. But the proposed one is expected to be well-capitalised by banks —both state-run and private. Though the government won’t hold any equity in the bad bank, it has now backed the idea of setting up the entity after initial reservation.
Importantly, the new model seeks to allay apprehensions of state-run banks that their decisions on haircuts might be probed later by the 3Cs (CBI, CVC and CAG). “That problem will be solved by the use of security receipts,” the CEA said. This way, although the toxic assets may still have to be transferred at a discounted rate, it won’t lead to that sort of questioning.
Similarly, the existing ARCs don’t have the expertise to handle large assets worth over Rs 500 crore each. “Large assets require a whole different level of expertise to be handled, because they go through not just financial restructuring but also operational restructuring,” Subramanian added. Such big assets worth over Rs 2 lakh crore are envisaged to be transferred to the new bad bank. “Nothing of this magnitude has ever been handled by any of the existing ones.” The new ARC, however, will have an asset management company, comprising professionals with expertise to work out the assets and sell them.
Moreover, since the ARC-AMC will be a private entity, the decision-making is expected to be swift, as its proposals need not be vetted by the 3Cs. Quick decision-making is very important in both generating and preserving value of the assets.
Asked about the regulatory relaxation on the provisioning requirements against bad assets that bankers are seeking to make the new ARC-AMC model work efficiently, the CEA said the central bank is looking into it. “Details are being worked out,” he said.
Commenting on the Budget, Subramanian said there were four stand-out aspects in it: massive hike in healthcare spending; reforms in the financial sector; enhanced focus on infrastructure creation; and honesty and transparency in budget accounting. These will not just boost growth next fiscal but set the foundation of high growth of 8%-plus over the next decade.
The government has raised healthcare allocation by a massive 137% to Rs 2.24 lakh crore for FY22 (from the BE of FY21). Healthcare being essentially a state subject, two-thirds of spending in this sector is typically done by the states. The sharp hike in the Centre’s spending will encourage the states to raise their expenditure too, he added.
In the financial sector, the government has proposed to privatise two state-run banks and an insurer. The ARC will be set up for the resolution of bad debt. Foreign direct investment limit in insurance will be raised to 74% from the current 49%, subject to certain conditions. A development finance institution will be set up, with a primary focus on infrastructure creation.
The sharp hike in the capex target for FY22 to Rs 5.54 lakh crore, up 26.2% from the revised estimate for this year and 34.5% from the budget estimate, will have huge multiplier effect, he said.
Finally, the transparency in the Budget numbers (including shifting below-the-line food subsidy to above-the-line) and conservative projections in tax and non-tax revenue collection and GDP growth signals transparent budget-making, he added.