View | Private sector ARCs' dubious potential coming to fore - Its supposed expertise is delusion

It is common for retired customs and excise officials to morph into consultants post-retirement. What they bring to the table for clients is the inside knowledge of departmental functioning in addition of course to their domain acumen. It takes a crook to tame a crook. A good policeman should be familiar with the ways of criminals. In that sense, he must be a potential criminal. In these lights, one can understand if ARCs expertise stem from engaging borrowers who have had experience in successfully parrying their repayment liabilities and lenders who have played ball with them! Levity aside, one wonders what exactly ARC can do that bank itself cannot.

ARCs do not have the muscle power of the 'recovery agents' either. With the Supreme Court coming down heavily on banks employing thugs who employ strongarm tactics like seizing the hypothecated car’s key on traffic signals, the power of thugs euphemistically called recovery agents, is on the decline having been defanged. So, what is the esoteric expertise of ARC?

ARC also goes by the name bad bank again a euphemism for being a repository of bad debts or NPAs. Recently the government had set up an official ARC or bad bank going by the name of National Asset Reconstruction Company Limited” (NARCL). It will acquire stressed assets worth about Rs 2 lakh crore from various commercial banks in different phases. Another entity — India Debt Resolution Company Ltd (IDRCL), which has also been set up — will then try to sell the stressed assets in the market. The NARCL-IDRCL combine then is the new bad bank which will work in tandem.

The government stands in readiness with Rs 30,600 crore to be used as a guarantee war-chest should there be a shortfall between market realizations and outstanding. The NARCL will first purchase bad loans from banks. It will pay 15 percent of the agreed price in cash and the remaining 85 percent will be in the form of “Security Receipts”. When the assets are sold with the help of IDRCL, the commercial banks will be paid back the rest. Note that the ARC is going to focus on marketing the security receipts and not on recovering from the defaulter. The buyer of dubious security receipts knows what he is buying junk. So, who are we fooling? The hapless bank is not going to recover more through this convoluted process than it, itself would have.

It takes a leap of faith to believe that what banks themselves could not do would be done by the so-called ARC or bad bank. The American morbid fascination with convoluted financial arrangements is fairly well known. In the name of unlocking the illiquid assets of home finance companies (receivables in the form of EMIs spread over 15 to 30 years), the process called ‘securitization’ was started. It consists in ridding such receivables from the home loan company’s balance sheet and assigning it to a special purpose vehicle (SPV) which would on the strength of such EMI-backed receivables issue bonds in the market and pay off the home loan company. With the funds thus acquired from the SPV, the home loan company would go on a fresh lending spree. This was supposed to result in a virtuous cycle. It is another matter that the 2008 US financial system collapse was substantially thanks to this chronic tinkering. The point is why can’t the home loan company itself transparently float bonds backed by the long-term receivables?

Let us face it. A banker’s job among other things is to recover the loan with interest. If he has failed in this, he has to blame the poor loan application appraisal, inadequate and difficult to enforce securities and the impotent laws that allow crooked borrowers to smirk at the lenders. ARCs are not going to transform the recovery scene. The government promoted bad bank NARCL might at best provide employment to former bankers. It is going to foster the smug and dangerous belief that at the end of the day they would be able to pass the buck to the bad bank. Bad bank is of a piece with the typical government response to any problem — appoint a committee. It buys time for the government in the dock. The bad bank also buys time for banks besides facilitating buck-passing.