Tackling NPAs: RBI not in favour of giving special status to NAMCO

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Mumbai | January 26, 2016 6:48 AM

The Reserve Bank of India (RBI) is against giving any special dispensation to the proposed National Asset Management Company (NAMCO) to tackle the growing menace of non-performing assets (NPAs) of the banking sector.

raghuram rajan rbiThe RBI was also not receptive to the idea of setting up a special purpose infrastructure fund or a development financial institution which would lend to projects that require last-mile funding and are classified as stressed assets. (Reuters)

The Reserve Bank of India (RBI) is against giving any special dispensation to the proposed National Asset Management Company (NAMCO) to tackle the growing menace of non-performing assets (NPAs) of the banking sector. The RBI has also rejected the proposal to remove the 49 per cent cap on equity stake of entities in asset reconstruction companies (ARCs).

While agreeing to the proposal of NAMCO ‘in principle’, the RBI is willing to consider it as another asset reconstruction company. “The RBI does not have any issue in the creation of NAMCO like any other ARC. However, it may not be desirable for the RBI or the government to encourage sale of NPAs to one particular ARC or to give relaxation to one ARC as it will create a non-level playing field,” the RBI said in a letter to the Ministry of Finance.

“In this connection we submit that 15 asset reconstruction companies are already registered with the RBI,” the central bank said. The RBI letter follows suggestions to create NAMCO with banks as majority shareholders and that “the RBI and the government may provide certain special dispensation including that of providing regulatory relaxations to sale of NPAs to NAMCO”.

The proposal to create NAMCO was also discussed at a meeting convened by Prime Minister Narendra Modi with bankers and India Inc in September 2015. Bankers said NAMCO will be another ARC without special concessions.

“Our circular dated February 9, 2014 on ‘Framework for revitalising distressed assets in the economy…’ prescribed measures to encourage banks to sell their NPAs to ARCs. There has been an increase in sale of NPAs by banks to ARCs subsequent to our circular,” the RBI said in the letter, a copy of which was provided to The Indian Express in response to an RTI query. ARCs have bought NPAs worth Rs 10,000 crore from banks during the October-December period. NPAs and stressed restructured assets of banks have crossed Rs 7,00,000 crore mark.
On the proposal to remove the 49 per cent cap on equity stake of entities in ARCs, the RBI said, “the logic behind the stipulation has been to ensure a widely held shareholding. ARCs, being lightly regulated entities, may have corporate governance issues. While removing this cap may help in quicker decision making, but it may also lead to certain issues such as unfair compromises forced on borrowers (even when they are facing temporary financial crunch), biased decision making etc and may not fulfill the objective of ARC performing as supportive system with greater emphasis on asset reconstruction rather than asset stripping.”

The ceiling for FDI in ARCs was increased to 74 per cent subject to the condition that no sponsor may hold more than 50 per cent of the shares in ARC. “In other cases of domestic sponsors also, the same threshold is followed in order to ensure level playing field,” it said.

The RBI was also not receptive to the idea of setting up a special purpose infrastructure fund or a development financial institution which would lend to projects that require last-mile funding and are classified as stressed assets.

Listing various measures taken to provide impetus to infrastructure lending and address the stress in the sector, the RBI said banks and FIs can enter into take-out financing arrangement with IDFC and other FIs, banks are allowed to have flexible structuring and refinancing of project loans (5:25 scheme) and banks can issue long-term bonds with minimum maturity period of seven years with certain incentives. It has also allowed the creation of infrastructure debt funds as NBFCs or mutual funds.

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