Informist, Monday, Feb 8, 2021

By T.Bijoy Idicheriah and Alekh Archana

MUMBAI - The Reserve Bank of India has suggested government providing a guarantee for security receipts that will be issued by the proposed asset reconstruction company to take over stressed loans of banks, a banking industry source said.
 
"The government doesn't want to put in money as equity, but wants the new ARC to ease stress on the books of banks," the source told Informist.
 
"To achieve this, one of the suggestions that has come up in discussions with the RBI is a specific guarantee from the government for the security receipts issued. This will be less cash guzzling and also contain the marked-to-market impact of such holdings of banks."
 
The Budget for 2021-22 (Apr-Mar) has proposed setting up of asset reconstruction and management companies to take over existing stressed assets of banks.
 
Finance Minister Nirmala Sitharaman on Sunday hinted at the possibility of such guarantee.
 
"The government may have to give some guarantee, but the solution is coming out of the banks," she said. "So when details are completed, we will put it out for everybody to know."
 
Bankers are of the view that since valuation and provisioning of stressed assets may vary from bank to bank it may act as an impediment for the sale.
 
Something like a guarantee on security receipts will ensure that the sale to the asset reconstruction company does not lead to additional provisioning burden for some banks, said a senior executive with a state-owned bank.
 
Security receipts, issued in lieu of sale of stressed assets, forms part of the selling bank's investment book. The norms for valuation of such receipts are the same as those for investments by banks in non-SLR instruments.
 
Since security receipts are categorised as investments, they are subject to marked-to-market valuation.
 
From April 2018, banks have to make provisions for sold stressed assets assuming that they remain on the books. This is applicable in cases where security receipts make up for more than 10% in the sale of non-performing assets.
  
This norm has led to banks insisting on full upfront cash on sale of assets against the earlier 15:85 pricing structure, where banks will get 15% upfront cash and the remaining 85% in the form of security receipts.
 
Last week, Financial Services Secretary Debasish Panda said banks will be able to transfer stressed assets to the asset reconstruction company at net book value, which is the value of that asset minus the provisioning that has already been done.
 
"The deal happens typically based on the net book value," Panda had said. "It will be 15% in cash and 85% will be by way of securitised receipts. For banks, it will be cash neutral."
 
Panda had said that in case the banks needed a guarantee for the security receipts the government could consider providing it.  End

Edited by Arshad Hussain

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