Banks review sale of loans under resolution to ARCs
Why in news?
Banks are rethinking plans to sell bad loans under resolution in bankruptcy courts to asset reconstruction companies (ARCs), three bankers aware of the matter said, after State Bank of India and Indian Banks’ Association expressed their displeasure.
- Union Bank of India and Bank of Baroda (BoB) are looking to sell their exposure in Bhushan Steel Ltd to SSG Capital owned Assets Care & Reconstruction Enterprise Ltd in an all-cash deal,
- According to a Union Bank official, one of the three bankers cited earlier, the bank is looking to sell nearly Rs2,700 crore of domestic exposure in Bhushan Steel and Essar Steel Ltd before March-end.
- the second of the three bankers, said his bank was also looking to follow BoB’s example of selling their foreign exposure worth $300 million in Essar Steel to foreign funds.
- Recently, Indian Overseas Bank too had sold its exposure of Rs1,600 crore in Essar Steel and Rs600 crore in Bhushan Steel to Edelweiss Asset Reconstruction Co. Ltd and Assets Care and Reconstruction Enterprise Ltd, respectively.
- Banks are reviewing sales of these loans, which they are planning to sell to ARCs, following the latest letter issued by the IBA.
- Chairperson of IBA said that We believe that any proposal to sell bad loans undergoing insolvency proceedings should be collectively decided by the Joint Lenders’ Forum (JLF). Since the asset is admitted to the National Company Law Tribunal (NCLT), the matter is sub-judice. Hence, banks should avoid selling these assets as it would strengthen the ARCs’ position and disturb the resolution plan.
- The finance ministry’s department of financial services has also informally expressed its displeasure over the sale of loans to ARCs.
- According to the Union Bank official cited above, the bank was looking to sell bad loans to ARCs to clean up books and avoid prompt corrective action (PCA) being invoked by the RBI against them.
- Under the new PCA framework, breaching a net non-performing assets (NPA) ratio of 6% invites action, including limits on lending and expansion.
What are ARCs?
An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or bad assets from banks and financial institutions so that the latter can clean up their balance sheets. Or in other words, ARCs are in the business of buying bad loans from banks. ARCs clean up the balance sheets of banks when the latter sells these to the ARCs. This helps banks to concentrate in normal banking activities. Banks rather than going after the defaulters by wasting their time and effort, can sell the bad assets to the ARCs at a mutually agreed value.
SARFAESI Act 2002– origin of ARCs
- The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002; enacted in December 2002 provides the legal basis for the setting up ARCs in India. Section 2 (1) of the Act explains the meaning of Asset Securitization. Similarly, ARCs are also elaborated under Section 3 of the Act.
- As per amendment made on the SARFAESI Act in 2016, an ARC should have a minimum net owned fund of Rs 2 crore. The RBI plans to raise this amount to Rs 100 crore by end March 2019. Similarly, the ARCs have to maintain a capital adequacy ratio of 15% of its risk weighted assets.
- The SARFAESI Act helps reconstruction of bad assets without the intervention of courts. Since then, large number of ARCs were formed and were registered with the RBI which has got the power to regulate the ARCs.
Q.Consider the followings with respect to Asset Reconstruction Company (ARC)
1) An Asset Reconstruction Company is a specialized financial institution that buys the NPAs or bad assets from banks and financial institutions.
2) Banks can sell the bad assets to the ARCs at a mutually agreed value.
3) The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 provides the legal basis for the setting up ARCs in India.
Choose the correct answer from the codes given below
a) 1 only
b) 1 and 3 only
c) 1 and 2 only
d) All of the above