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Banks will quit ARCs when they establish a "bad bank"

Lenders have begun seeking purchasers for their interests in asset reconstruction companies (ARCs) in order to free up money for the establishment of the National Asset Reconstruction Co. Ltd (NARCL), a 'bad bank' that they will jointly operate.

In February, the state-owned Punjab National Bank (PNB) announced the sale of its whole 10.01 percent interest in Arcil, one of India's oldest ARCs with assets of 12,000 crore under administration. Following suit, private lender IDBI Bank has begun searching for a bidder for its 19.18 percent holding in Arcil. Similar discussions are under on to sell a stake in ASREC (India) Ltd, a Mumbai-based ARC. On Thursday, three public sector banks—Union Bank of India, Indian Bank, and Bank of India—announced a combined plan to sell up to 88.4 million shares, accounting for up to 90.31 percent of the total market capitalization of ASREC.

SBI Capital Markets Ltd. (SBI Caps) has been appointed as the transaction's sell-side advisor. It has been said that a potential bidder "must have a net worth of not less than 100 crore or assets under the control of not less than 500 crore." According to experts, the lenders' action is consistent with their investment intentions in NARCL, which is likely to play a significantly larger role in the cleaning of problematic assets in the banking system.

According to RBI data, by the end of March 2021, 7.5 percent of all bank loans had gone sour. The main advantage of NARCL is that it will not have to deal with the problem of aggregating debt, which ARCs have been dealing with for a long time. They will now be allowed to undertake debt recasts since no other lender will have opposing views.

As an asset reconstruction business, we encounter such issues since 100% debt aggregation is not taking place," Pallav Mohapatra, CEO of Asset Reconstruction Co. (India) Ltd and former Governor of the Central Bank of India, stated in a recent interview. NARCL will be owned by a group of lenders, including Punjab National Bank and Canara Bank.

According to the government, NARCL will house bad loan accounts of 500 crore or more. According to documents with the Registrar of Companies, NARCL, or the so-called bad bank, was formed in Mumbai on July 12 with a paid-up capital of 74.6 crore (RoC). Padmakumar Madhavan Nair, a stressed assets expert from the State Bank of India (SBI), will serve as managing director of the bad bank.

The establishment of NARCL is part of the government's efforts to clean up the financial system, which is sitting on one of the world's largest piles of toxic assets. The storage of bad loans by NARCL is anticipated to help banks to minimise losses and resume lending.

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