Ten steps for improving the effectiveness of ARC sector

ARCs were setup under the SARFAESI Act, 2002, to relieve banks and financial institutions of the burden of NPAs and allowing them to focus on their core activities. In the last few years, stressed assets of the Indian banking industry have risen alarmingly and is at a level of over 11 per cent of gross advances. However, ARCs which were created to combat this menace of growing NPAs, have not been effective in absorbing the accumulated stock and increasing flow. This has necessitated a review of the functional effectiveness of ARCs and measures are required to strengthen the institutional framework.

Even after 12 years of its existence, the ARC sector is still struggling to play an effective role. Aggregate networth of all 15 ARCs is just about Rs 3,400 crore, compared to the outstanding gross NPAs of the banking system at over Rs 3 lakh crore, which is nearly 100 times the combined net worth of all ARCs. If we take cognizance of the whole of stressed assets, including restructured assets, the presence of ARCs will look still more diminutive.

ARCs lack the capability to stand up to the challenge. Even in cases where they would like to acquire, there is a stalemate over NPA sales, because of the price expectation mismatch between banks and ARCs. Banks have time-based provisioning and, quite often, there is a disconnect between the underlying value of an asset and its book value. Public sector banks tend to play safe in having a 'provide and hold' approach to NPAs rather than sellling it at a lower price due to apprehensions of accountability for taking such a decision on a later date. For NPA resolution, debt aggregation is the key to sort out inter-creditor issues. However, due to lack of uniformity in asset classifications, variations in security and charge particulars, and differing price expectations in respect of assets across various banks, debt aggregation suffers and creates bottlenecks in NPA management.

Further, ARCs face considerable difficulty in transaction consummation because of widely-divergent stamp duty and registration charges from state to state, and procedures adopted at various places even within the same state. When assets are across multiple states, the problems get compounded.

Against the above backdrop, there is now an urgent need to address problems faced by ARCs and to empower them to play effective role in NPA management. Here are 10 steps for improving the functional effectiveness of the ARC sector.

1. Allow ARCs to go public. This will help mobilise funds and ensure greater disclosures and more transparency.
2. Remove the sponsor holding restriction of 50 per cent (excluding where banks are the sponsors and the holdings are capped by the Banking Regulation Act). This will facilitate them to have deep pockets and adequate risk appetite to invest without waiting for a matching contributor.
3. Widen definition of qualified institutional buyers to include high networth individuals.
4. Allow listing of SRs and allow free transferability of these SRs.
5. Issuance of comprehensive guidelines for valuation of NPAs for sale to ARCs. In case of 100 per cent settlement funding in cash, bilateral transactions be permitted without any auction.
6. Unified approach by banks in selling asset under consortium finance. Threshold of 75 per cent for acceptance of any offer made by an ARC in case of consortium/ multiple banking arrangement may be reduced to 60 per cent.
7. Uniform stamp-friendly regime across states.
8. Simplify and rationalise guidelines related to the change of management of defaulting companies and removal of the clause that mandates return of management to the old defaulting management after payment of dues.
9. Thorough review of process efficiency (or lack of it) in debt recovery tribunals / district magistrates in assisting security enforcement and ensuring timely disposal of cases.
10. Constitute a key advisory group with all stakeholders to review the functioning of the ARC sector and suggest time-bound measures.