Finance ministry drafts incentive scheme for asset reconstruction companies to reduce junk assets

MUMBAI:The government has thrown new rules at state-owned banks, nudging them to salvage their junk loans, which have strained balance sheets and re-priced stocks of several lenders.The finance ministry, concerned that a mountain of loss assets could call for bigger fund infusion into banks, has stepped in as the junk loan market has been at a standstill since last year.A string of auctions by banks to sell non-performing assets has bombed with the lenders unwilling to accept the price asset reconstruction companies, or ARCs, who deal with sticky loans were willing to fork out.”The ministry must have felt that it was high time to lay down some ground rules and push the banks for quicker recovery of loss assets,” said a junk asset dealer who has handled just one transaction in the last one year.

In a recent communique to state-owned banks and ARCs sponsored by public sector institutions, the ministry has laid out broad parameters for recovering dud loan assets. It has also put in place an incentive structure to remunerate ARCs. As per the scheme, the lower the collateral value on a loan account, the higher is the upside for the ARC.

Banks’ loss assets, for which lenders have to make full provisioning equal to the loan amount, add up to more than Rs 30,000 crore out of the¬†PSU banks’ total non-performing assets of Rs 1 lakh crore. Any recovery from loss assets adds to a bank’s net worth.

The ministry’s move to fix a commission and incentive structure will provide some relief to ARCs as a number of them are struggling to stay afloat since more and more banks are preferring to revolve bad loans on their own.

As per the incentive structure, if the recovery is more than the principal amount and the loan has tangible security worth more than the principal, banks should pay 5% of the recovered amount in excess of the principal to the ARC.

But if the recovery is less than 90%, then even if the security is more than the principal, banks need not pay any commission. In cases where the recovery is 90% or more than the principal but if the loan does not have tangible security, banks should pay  commission as high as 10%.

A commission of 6% is fixed if recovery is 90% or more of the principal and tangible security is worth 50-90% of the loan. If recovery is over 90%, but the collateral is less than 50% of the principal, ARCs will be paid7%.

The finance ministry arrived at the commission framework after consulting PSU banks and ARCs like Arcil, ISARC and ASREC.

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