NEW DELHI: India’s bad loan clean-up exercise seems to have begun with lenders having already identified corporate loans of over Rs 1.45 lakh crore so far that will be transferred to the planned Asset Reconstruction Company (ARC). While the true level of NPAs resulting from Covid-19 remains unclear since the Supreme Court’s standstill order on NPA recognition is still in place, sources say that there are NPAs worth nearly Rs 2.5 lakh crore in around 70 large accounts that banks currently have no power to recover.
“These are all stressed assets… The ARC-AMC (Asset Management Company) model will enable aggregation of these toxic assets from several banks to a single entity with professionals whose sole focus would be value-maximisation in a market-led way. The transfer of stressed assets to ARC will happen at net book value,” said an industry source.
In fact, the Indian Banks’ Association (IBA) has also asked lenders to furnish data on stressed accounts with principal outstanding worth Rs 500 crore and above. This exercise will help in assessing the capital required to float the proposed ‘bad bank’. The IBA is currently working with the Department of Financial Services and a few lenders to set up the ARC, whose objective is to extract capital stuck in soured loans and help banks to focus on credit.
Typically, ARCs purchase loans by offering 15 per cent cash and the remaining 85 per cent in security receipts against bad debts, entitling banks to get a return in line with the amount recovered. While the Centre will not provide any direct equity support to the ARC, it may provide sovereign guarantees that may be needed to meet regulatory requirements. Experts, however, warn that the bad bank may not yield proper results without sufficient recapitalisation.
Meanwhile, India’s overall Gross NPA ratio expected to rise from 7.5 per cent in September 2020 to 13.5 per cent by September this year under the baseline scenario, according to the RBI’s Financial Stability Report. If the macroeconomic environment worsens, the GNPA ratio may escalate to 14.8 per cent.