National Arc to form my end of March; Bad debt transfer can take place by September

The National Asset Reconstruction Company (ARC) has received government approval for the guarantee and will be formed and registered with RoC by March 31.

The National Asset Reconstruction Company proposed by the finance minister in the Union budget last month could be formed within the next two weeks, three people directly involved in the case told CNBC-TV18.

“We will proceed with the implementation of the proposal during this month. We will register the company as National Asset Reconstruction Company with the RoC (Registrar of Companies) by March 31, ”said a senior executive overseeing the entire process on condition of anonymity.

The process of launching the national ARC accelerated after the Ministry of Commercial Affairs gave the green light to banks to use the word “National” in the name of the company, another senior explained. responsible person involved. The government has agreed to provide a sovereign guarantee to security receipts issued by the national ARC, the person added.

The transfer of bad debts, however, will not happen immediately. “We need to form the company first, register it with RoC, then we will go to RBI for an ARC license… It will take about three months for it to be fully operational, and six months before the transfer of assets. can take place, ”said one of the above.

CNBC-TV18 previously reported that the Association of Indian Banks (IBA) was working with banks to identify bad debts to be transferred to the CRA. “We have identified around Rs 1.50 to 2 lakh crore of non-performing assets in the banks which will be transferred to the national ARC, but this will be done in one or more installments,” added one of the people closely involved. . The list consists largely of legacy accounts, which have been in the NPA category for at least four years and each have over Rs 500 crore in circulation.

“All accounts that are transferred to CRA will be 100% delivered by this quarter (end March 31, 2021). The remaining provisioning will be competed with by the banks during this very quarter, ”said the director of a large public sector bank.

To ensure better price discovery, it is understood that banks will use a “Swiss challenge method” to transfer assets. Under the Swiss challenge method, a potential buyer – in this case the national ARC – makes an offer to the lender, who then publicly calls for counterbids from other potential buyers / ARCs. Once the bids are received, the bank first invites the securitization company to match the highest bid in this counterbid process to get the best value.

In these transactions, ARCs operate with the 15:85 model mandated by the RBI, in which the ARC pays banks 15% in the form of cash and 85% in the form of security receipts (SRs). Typically, a mismatch in expectations in asset values ​​has made banks reluctant to sell NPAs to CRAs. However, 100% provisioning can make banks more favorable to a sale, as there would be less hassle in selling it for less than realizable value, and sovereign backing can also give confidence that they would not. later removed by investigative agencies.

National ARC should be majority owned by public sector banks and state run NBFCs like PFC, REC. Banks estimate that ARC may need 5,000-7,000 crore rupees of equity to start with, and since banks would not be allowed to hold more than 10% of the capital each, the individual contribution would be d ‘About 500-700 crore rupees each if 10 financial institutions participate.

First publication: STI

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