Even before the Covid-19 pandemic hit the Indian economy at large, the banking sector had been living with the mounting stress of non-performing assets (NPAs). While the Reserve Bank of India (RBI), under the aegis of the current and previous two governors, has been doing a lot to tame the NPA menace, the moderating economy and the over-leveraged bets of India Inc. have added to the pain of the banking sector.

According to data from the central bank, at the end of March 2020, gross NPAs of all the scheduled commercial banks (SCBs) added up to over ₹8.96 lakh crore, which worked out to 8.21% of their gross advances. Of this, cumulative gross NPAs of public sector banks (PSBs), at ₹6.78 lakh crore, accounted for over 75.7% of the system NPAs, and worked out to 10.25% of their bank group’s gross advances.

While the macroeconomic situation is showing gradual signs of improvement, the banking sector, burdened with stressed assets on its books, will take a longer time to recover from the stress. However, finance minister Nirmala Sitharaman seems to have taken cognisance of the challenges that the PSBs face.

The proposed ARC/AMC is expected to result in faster and a better resolution of stressed assets of lenders. Apart from improving reported financials, this will also free up the bandwidth of management to focus on core lending operations.
Karthik Srinivasan, senior group vice president, ICRA Ratings

“The high level of provisioning by public sector banks of their stressed assets calls for measures to clean up the bank books,” Sitharaman said in her Budget speech. While the idea of a bad bank—where stressed assets of all banks can be parked—has been a hot topic of private discussions as well as industry forums, Sitharaman came up with a different version of a bad bank.

“An Asset Reconstruction Company (ARC) and Asset Management Company (AMC) would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds (AIFs) and other potential investors for eventual value realisation,” Sitharaman said.

And banking sector observers have welcomed this move. “The proposed ARC/AMC is expected to result in faster and a better resolution of stressed assets of lenders,” says Karthik Srinivasan, senior group vice president at ICRA Ratings. “Apart from improving reported financials, this will also free up the bandwidth of management to focus on core lending operations,” he adds.

Top bosses at PSBs would agree with Srinivasan’s view. Take A. K. Das, managing director and CEO of government–owned Bank of India, for instance. The creation of an ARC-AMC institution is one of the few moves “which provide a feel good dimension to our real sector, including financial stability”, he says.

But retired bankers reveal a lesser–known relief. “When the proposed mechanism hits the ground, those taking the hard decisions will not have to fear the consequences of facing vigilance enquiries,” says a retired banker who led a large PSB until 2016. “Hopefully, there will be no enquiries around concurrences with the vested parties while arriving at the haircut,” the veteran adds. Haircut is the difference between the actual value of the asset, and the value at which it is settled or sold.

While the move is unique in the recent banking history of the country, ARCs in themselves are not a new concept. As per RBI, India has 28 ARCs operational as of July 16, 2020. And, Asset Reconstruction Company (India), better known as ARCIL, has been around since 2002.

While welcoming the finance minister’s idea of managing and aggregating NPLs of the banking system, Aswini Sahoo, ARCIL’s chief investment officer, argues that the concept of creating another ARC may be avoided.

“ARC business in India has fully developed over the last 15 years with strong players like ARCIL which are well governed with distributed shareholding,” says Sahoo. “It might- be time and cost-saving to use the existing physical and intellectual infrastructure in aggregating and resolving the NPLs,” he adds.

Sahoo also points out that it might be a good idea to capitalise existing ARCs with long-term capital and guarantees, to aggregate the debt of the system and then pass it to risk-taking investors. “But kudos to the finance minister for taking steps to provide a growth booster, which will eventually revive the corporates and reduce the financial stress,” Sahoo adds.

In another move, Sitharaman proposed further recapitalisation of PSBs to the tune of ₹20,000 crore during FY2021-22, “to further consolidate the financial capacity of PSBs”. In one of the notes to an annexure to the Budget speech, the finance minister highlighted that amounts of ₹80,000 crore, ₹1,06,000 crore, and ₹65,443 crore were infused for recapitalisation of PSBs during FY2017-18, FY2018-19 and FY2019-20, respectively.

During FY2020-21, so far, an amount of ₹5,500 crore has been infused by the government as fresh capital in PSBs through non-interest bearing special securities. The note further added that the government has infused capital through the issue of bonds in three other lending institutions, namely, IDBI (₹4,557 crore), EXIM Bank (₹5,050 crore), and IIFCL (₹5,297 crore).

While the finance minister’s moves were primarily aimed at PSBs, the S&P BSE Bankex saw a record jump of more than 3,112 points, rising 8.98% to touch the day’s high of 3,775.02 points. This also turned out to be the 52–week high for the index, which corrected by over 225 points to close the day at 37,459.19 points—2,887 points or 8.33% higher than Friday’s close of 34,662.51 points.

State Bank of India (SBI), which happens to be the sole PSB representative on the BSE Bankex, touched the day’s high of ₹315 a share—higher by nearly ₹33 a share, marking a rise of nearly 11.7%. At close of trade, SBI traded at ₹311.1 a share which was a little over ₹29 a share and higher by 10.3% to Friday’s close.

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