New ARC aimed at specific set of bad assets with PSBs: Das

The new asset reconstruction company (ARC) proposed in the Union Budget is aimed at resolving a specific set of bad assets with some public sector banks (PSBs) and there is room for one such company, Reserve Bank of India (RBI) governor Shaktikanta Das said on Thursday. The central bank is closely looking at an updated regulatory architecture for the ARC sector, just as it has done for non-banking financial companies (NBFCs) and microfinance institutions (MFIs), Das said, speaking at an online event hosted by the Bombay Chamber of Commerce.

In response to a query on the need for another ARC, the governor said that the Budget proposal is the result of a bank-led initiative. “The public sector banks have together come forward and given a proposal to (the) government, which the government has accepted and announced in the Budget that an ARC-type entity – what you call a bad bank, it’s not really a bad bank – will be set up to take over the stressed assets, the NPAs from the books of public sector banks and to try and resolve them like any other ARC. That is targeting a specific set of bad assets which certain public sector banks are holding and it is an initiative which has come from the public sector banks,” Das said, adding that in no way will it jeopardise the activities of the existing ARCs. “I think there is scope to have one more strong ARC formed by the banks themselves.”

Das said that over the last two years, the RBI has been steadily focusing on one sector after the other. It has refined the regulatory architecture in respect of NBFCs, MFIs and cooperative banking. There is also work going on in the digital arena. “Therefore, ARCs is one area which is very much receiving our attention – refining and further upgrading the regulatory architecture in respect of the ARCs to ensure that they have skin in the game and they are very much in business,” he said. While the regulator had held discussions with some ARCs a year ago and had certain plans in mind, the Covid outbreak came in the way of those.

There is a growing realisation and awareness among banks with regard to dealing with bad assets, Das said. Even in the context of the asset classification standstill which has been ordered by the Supreme Court and where final orders are expected, banks have been making proactive provisioning in their books and the provision coverage ratio of all scheduled commercial banks now stands at 75%. This is a significant improvement over the past.

“From Reserve Bank’s side, we have sharpened and deepened our supervisory methods. We are now doing deep dive into areas of banking which were not done earlier. We are looking into business models of banks, we are looking at potential vulnerabilities and fragilities building up in the banks. So we have sharpened our supervision,” the governor said.

Secondly, a system of ongoing supervision is now in place because the RBI has data from the Central Repository of Information on Large Credits (Crilc) database. It has an idea of what the quantum of assets are where the delay in repayment is up to 30 days, up to 60 days and up to 90 days. “So we have a precise idea of the build-up of stressed assets in banks and as soon as we see a sign of stress, we immediately enter into a discussion with the banks and proactively deal with these problems,” Das said.

The third factor which will help deal with stress is the appraisal skills of the banks themselves. “I think this is one area where there is a need for governance focus of the bank managements on improving their appraisal skills and on taking measures to see that the evergreening of loans, which was happening at some point, is also suitably plugged,” Das said. He added that today, the Indian financial sector is in a much better place than it was earlier. “We have a fairly clear idea about the size of bad assets that are building up in the system. We are constantly engaged with both public and private sector banks to deal with this issue,” the governor said. The key to all this, apart from the RBI’s supervisory and regulatory initiatives, is to improve governance at banks, both from the public and private sectors.