The finance ministry is planning to allow asset reconstruction companies (ARCs), such as Arcil, Pegasus and Reliance ARC, to raise funds through public issue of shares. The ministry is in discussions with the Reserve Bank of India (RBI) in this regard, a senior official familiar with the proposal said. The move would enable ARCs to raise funds through initial public offerings and expand their business of bulk buying of bad loans.
The idea comes at a time when non-performing assets (NPAs) of public sector banks (PSBs) are increasing sharply. Besides opening an avenue of funding for ARCs, their listing on the exchanges would help bring greater transparency in the operations of these firms.
State-owned banks have been hit hard by growing bad assets in the past couple of years. ARCs are currently not allowed to issue shares to the public, but can raise funds from qualified institutional buyers (QIBs). QIBs can subscribe to security receipts issued by ARCs.
Finance minister P Chidambaram is likely to discuss banking sector issues, including the NPA situation, with the heads of the PSBs at a meeting next week. The economic slowdown and rising interest costs have adversely affected the repayment capacity of their borrowers. A deficient southwest monsoon could lead to a further jump in bad loans of the banks, especially in the agriculture segment.
The gross NPA ratio in the banking sector increased to 2.9% as on March 31, 2012, from 2.4% in March 2011 and 2.8% in September 2011, as per the latest data available with the RBI. The net NPA ratio rose to 1.3% in March 2012, against 0.9% in March 2011 and 1.2% in September 2011, the data show.
“NPAs grew at 43.9% year-on-year in March 2012, far outpacing credit growth of 16.3%. The ratio of NPAs (net of provisions) to capital also falls short when benchmarked against the peer economies,” the RBI said in its Financial Stability Report in June.
Asset reconstruction companies, such as Arcil, buy bad loans from banks, typically at steep discounts and recover payments from the defaulting borrowers. The RBI has approved about a dozen ARCs, who have now acquired assets worth close to R1 lakh crore.
A committee in the department of financial services ? which oversees banking, insurance and pension sector regulations in the country ? had earlier this year recommended various reforms for ARCs, including permitting them to raise funds through a public issue of shares.
To create a more conducive environment for ARCs to grow, the government is also set to allow them to convert the bad loans they acquire from banks to equity in the debtor company. This is being proposed in the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2012. The amendments seek to strengthen both the Sarfaesi Act and the Recovery of Debts due to Banks & Financial Institutions (RDBF) Act. ARCs are interested in getting a majority stake in the distressed companies so that they could invest in turning around the company and benefit from any appreciation in its shares.
