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Wednesday, May 6, 1998

Asset reconstruction firm mooted to issue swap bonds for bad loans 

Our Banking Bureau  
Mumbai, May 5: The Narasimham Committee has recommeded the setting up of an asset reconstruction company (ARC) for banks with a high non-performing asset portfolio, which can then issue "swap bonds". This has been suggested as an alternative to the asset recontruction fund (ARF), which had earlier been recommended by the first Narasimham panel on financial-sector reforms set up in 1991.

The committee has said that all loan assets in the doubtful and loss categories should be identified and their realisable value determined. These assets could then be transferred to a reconstruction company. The panel suggests that after the company has been set up, it would issue NPA swap bonds to the banks for the realisable value of the assets transferred. The company could be set up by one bank or a set of banks. The panel is open to the idea of private sector banks participating in it. "In case the banks themselves decide to set up a company, it would need to be ensured that the staff required by it is made available bythe banks concerned either on transfer or on a deputation basis so that the staff with institutional memory on NPA is available to the company, and there is also some rationalisation of staff in the banks whose assets are sought to be transferred to the company," the report says. The company will have to file suits with debt-recovery tribunals for getting back the loans, the report says.

In the private sector, a bank wishing to hive off its bad loans will have three options: negotiating for a one-time settlement and down-payment or staggered payments over a period of time, transferring the assets, or carrying the loan in its books. The funding of such a company could be facilitated by treating it on a par with joint venture capital for the purpose of tax incentives. The committee has suggested that the high level of bad loans represents a continuing potential threat to the viability of the system. The committee believes that the objective should be to reduce the average level of net bad loans of all banksto below 5 per cent by 2000 and to 3 per cent by 2002.For banks with an international prescence, the minimum objective should be to reduce gross bad loans to 5 per cent and 3 per cent by the year 2000 and 2002, repectively, and net bad loans to 3 per cent by 2000 and to zero levels in 2002.

Substandard assets in 90 days: The panel is in favour of reducing the timeframe for treating an asset as a substandard one in case of default in interest payment from the current practice of 180 days to 90 days.

The committee has suggested that banks should move away from the current practice where income stops accruing when interest or installment of principal is not paid within 180 days towards the global norms of 90 days. The panel's report said the 90-day norm should be introduced in a phased manner by 2002.With regard to asset classification, the committee has suggested that there should be provisioning norm for standard assets as well. Currently, banks do not required to provide of standard assets. "In thecommittee's view a general provion of say one per cent would be appropriate and the RBI should consider its introduction in a phased manner," commitee says.At present, banks are required to provide for 10 per cent for substandard assets which turn doubtful after two years. In case of doubtful assets, banks are required to provide for 20 per cent for the unsecured portion in the first year, 30 per cent in second year and 50 per cent in third year.

Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.

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