Column: Utilising ARCs effectively

Apr 23 2014, 03:18 IST
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SummaryThe primary focus should be on developing the securitisation market and resolution of assets

Indian banks saddled with high NPAs are examining various options to clean up their books ahead of the stringent Basel III norms kicking in next year and, in the process, about 40 banks have recently invited bids from Asset Reconstruction Companies (ARCs) in the country for sale of bad loans worth R42,700 crore. This is almost four times the amount that was put up for auction in past quarters. The sudden eagerness on the part of banks to get junk loans off their books has also led to the rejuvenation of ARCs, which have been dormant for nearly a decade.

ARCs have been used worldwide (internationally, they are called AMCs) to resolve bad-loan problems, and have had a significant degree of success in both the developed and emerging economies. In the 1980s, US used a government-sponsored ARC—Resolution Trust Corporation (RTC)—to overcome its thrift crisis. RTC acted as a “bad bank” and functioned as an effective sales mechanism for disposal of assets. In the early 1990s, Mexico and Sweden demonstrated successful use of ARC mechanism (Fobaproa and Securum respectively) as a bad banks to clean and re-privatise/re-capitalise the banks. Korea and Malaysia used Kamco and Danaharta as the nodal agencies for acquiring and disposing NPAs. Kamco used the securitisation and the joint-venture routes for investor participation in the assets’ sale. Interestingly, Japan, China, Thailand and Indonesia have all used ARC mechanism during the South East Asian crisis.

The successful experiences in these countries suggest that there exists a case for ARCs being used effectively for asset disposition. But achieving these objectives requires many ingredients, some of which are: easily liquifiable assets such as real estate, professional management, political independence, adequate bankruptcy and foreclosure laws and, transparency in operations and processes. For example, in the Philippines the success of the AMCs was doomed from the start as the government transferred a large amount of politically-motivated loans and/or fraudulent assets to the AMCs.

What lessons does this hold for India? First, the security receipts (SRs) issued by ARCs against the asset sold may remain on the bank books if there is not sufficient depth in Indian bond market. Thus, there is an urgent need to broad base the country’s bond market that is dominated by highly-rated corporate entities. Interestingly, RBI guidelines on credit default swaps, introduced more than 2 years ago, has not even evinced sufficient interest as the guidelines are inhibited by

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