Page 33 - Banking Finance January 2018

ARTICLE

Graph -2 Gross NPAs recovery rate (%) important resolution mechanism.
ARCs have been successfully used as
part of a comprehensive NPA man-
agement strategy globally. ARCs
function more or less like an asset
management company, transferring
the acquired assets to one or more
trusts (at the price at which the fi-
nancial assets were acquired from
the originator).

Then, the trusts issue security re-
ceipts (SRs) to qualified institutional
buyers (QIBs) and the ARCs receive
Source : RBI
management fees from the trusts.
While SARFAESI has proved to be a big improvement over Any upside between the acquired price and the realized
DRTs (as proceedings can be initiated without court inter- price is shared between the beneficiary of the trusts (banks/
vention), its inefficient enforcement has rendered it less FIs) and ARCs.After the enactment of The Securitization and
effective. The inefficiencies in the process have led to delay Reconstruction of Financial Assets and Enforcement of Se-
in attempts by lenders to liquidate assets or take manage- curity Interest Act, 2002 (SARFAESI Act), many asset recon-
ment control of the entity in contention.The time taken to struction companies (ARCs) were formed in India. Unlike in
resolve has been very high and it takes more than four many other countries where debt aggregation grew under
years .(Graph-3) a government supported model, in India ARCs were set up
as private vehicles, mainly with
Graph -3 Time taken to Resolve ( in Years ) the support of banks.

The RBI has granted certificates
of registration to 15 ARCs with
estimated total value of SRs is-
sued amounting to Rs 630 billion.
While it is true that Indian banks
have managed to upgrade and
recover some of the loans, this
is not even 15 % of the total
stress asset. Much of the book
clean up has been done by sell-
ing the assets to asset recon-
struction companies (ARCs). Typi-
cally, ARCs issue security receipts
Source: World Bank (SRs) to banks and pay about 15
% of the asset price upfront Ac-
Thus, the present legal system is unable to cope with the cording to various estimates,in India,banks sell stressed
mammoth task, considering the ever increasing number of asset not more than a 40 % - 45 % discount and as per re-
suits and the limited infrastructure available at DRTs / port of India Ratings, SRs are outstanding to the tune of Rs
courts. Further, there are various issues relating to DRT and 60,000 crores backed by NPAs closed to Rs 1 trillion crore
SARFAESI, which needs to be strengthened to make these as at the end of March 2016.
channels more efficient and effective.
The total stressed asset in the banking sector estimated to
As the level of distressed assets within the Indian banking be $130 billion. The existing ARCs continue to suffer from
system reached an alarming level, ARCs emerged as an lack of capital and the stipulation that assets can be pur-

BANKING FINANCE | JANUARY | 2018 | 33

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