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Business News/ Industry / Banking/  RBI against banks having majority ownership in stressed asset funds
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RBI against banks having majority ownership in stressed asset funds

RBI governor Raghuram Rajan says majority ownership by banks of any such funds is probably not wise or warranted

The need for a solution to stressed assets has become urgent due to the surge in bad loans on bank books after the RBI conducted an asset quality review last year. Photo: Pradeep Gaur/MintPremium
The need for a solution to stressed assets has become urgent due to the surge in bad loans on bank books after the RBI conducted an asset quality review last year. Photo: Pradeep Gaur/Mint

Mumbai: The Reserve Bank of India (RBI) believes banks should not have majority ownership in any stressed asset fund that the government plans to set up together with banks and investors, governor Raghuram Rajan said on Tuesday.

The comment came a day after Union finance minister Arun Jaitley said the government is actively considering setting up stressed asset funds in association with banks that could provide equity or debt capital to stressed companies.

Last month, the Indian Banks Association (IBA) had written to RBI seeking its views on a bank-sponsored stressed asset fund. “In our view, majority ownership by banks of any such funds is probably not wise or warranted. Perhaps some form of minority ownership with a number of other players coming in addition to the government to provide capacity, especially for managing the stressed assets, would be appropriate," Rajan said.

“All we have been asked is if we think the structure is reasonable, what kind of structures we are okay with and what kind of ownership, etc., we are okay with. We have given our views on those. Ultimately, it is the government as well as other investors who will be coming along with the banks to set up such funds," he added.

Rajan has, in the past, opposed the idea of a “bad bank" and has said that resolution of stressed assets must happen through private entities such as asset reconstruction companies (ARCs).

Banks, however, remain reluctant to sell assets to ARCs due to differences in pricing of stressed assets. “Banks want to sell at a price ARCs do not want to buy at... The meeting of the two is a big issue, which needs to be resolved," Rajan said.

Bankers say the idea behind opening up a stressed asset fund is to get newer sources of funding. As such, Asset Reconstruction Company of India Ltd (Arcil), an ARC sponsored by large banks such as State Bank of India (SBI), IDBI Bank Ltd, ICICI Bank Ltd and Punjab National Bank, already exists and is functional as an avenue for lenders to sell their bad loans.

“In the new funds being proposed, unlike an ARC, the asset will continue to remain on bank books and there will be some infusion either through giving more working capital loans or by buying equity in the company. The fund will also bring in some international experience in turnaround and stressed asset management, which are missing from the ARC structure," a senior official at a state-owned bank said on condition of anonymity, as the final structure of the fund is not out yet.

When asked whether setting up such a fund is akin to creating a bad bank, which holds stressed assets on behalf of banks, Rajan said the answer to that depends on the price at which the fund buys assets from banks.

The RBI governor said there are a number of ways in which stressed asset funds could work. One option would be to set up a fund which can bridge any short-term shortage in capital being faced by stressed firms. To be sure, such stressed asset or special situation funds already exist in the market and lend to companies that are facing a short-term cash crunch at rates of 18-20%, which often ends up adding to the stress on a company’s balance sheet.

“Government as a stakeholder in such funds makes a lot of difference in cases like large infra projects where some pending approvals such as environmental clearances of fuel linkages can be cleared up instantly. But when it comes to other industrial stressed firms, it doesn’t make any sense. The government should not be in the business of turning around sick firms," said Satish Gupta, managing partner, Vertex Capital Partners, a distressed asset turnaround firm.

The need for a solution to stressed assets has become urgent due to the surge in bad loans on bank books after the RBI conducted an asset quality review last year. As of March 2016, gross non-performing assets (NPAs) of 40 listed banks were at 5.82 trillion, up 93% from 3.02 trillion in the same period a year ago. Net NPAs stood at 3.39 trillion, more than double the 1.68 trillion a year ago.

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Published: 07 Jun 2016, 01:51 PM IST
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