Mumbai: Reserve Bank of India Governor Shaktikanta Das on Thursday said that the proposed asset reconstruction company announced in the Budget 2021 will not jeopardise the activities of the existing players. Finance Minister Nirmala Sitharaman proposed to set up an asset reconstruction company and asset management company to consolidate and take over the existing bad loans.
“It’s an initiative that has come from PSU banks. An ARC type entity will be set up. That is targeting a specific set of bad assets. No way it will jeopardise activities of the exiting ARC. There is scope to have one more strong ARC formed by banks," said Das in an event organized by Bombay Chamber of Commerce.
As per the proposal, state owned banks plan to transfer nearly ₹2 trillion of bad loans to the ARC without going through any price discovery mechanism. In return, the ARC will provide 15% upfront cash to the banks, and issue security receipts for the remaining 85%, to be guaranteed by the government. Bad loan accounts of more than ₹500 crore will be eligible to be transferred to the new entity. The proposed ARC will require a capital infusion of at least ₹10,000 crore from banks.
ARCs have been concerned about their business once the new ARC comes into play. ARCs will suffer if all loans are taken over by a government-backed bad bank, forcing them to change their operating model. ARCs have been around since early 2000s and banks have been using this route to clean up balance sheets. However, according to RBI data, the ratio of ARCs’ cost of acquisition of bad loans to the book value of those loans has declined between FY19 and FY20. The central bank pointed out in the Trend and Progress of Banking in India report that this decline indicates lower realizable value of the assets.
When asked whether rising price of petrol and diesel prices will have an impact on inflation, Das said that there needs to be a coordinated action between centre and state governments to reduce taxes on these oil prices.
“This needs a coordinated action between centre and state because there are inherent taxes levied by both centre and state. There needs to be a coordinated and caliberated reduction of taxes. At the same time we realize that central and state governments as they have revenue pressures and they are required to spend higher sums of money to get people out of covid stress, the revenue requirement and compulsions of the govt are fully understood," he said.
Das also urged public and private sector banks to improve their credit appraisal processes and take measures to stop evergreening of loans. He said that the country's financial sector currently is in a far much better place than it was earlier.
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