Nine banks including the State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda (BoB) and two non-bank lenders are likely to put in Rs 7,000 crore jointly as initial capital in the proposed bad bank that aims to help extract funds stuck in non-performing loans.
Public sector banks like SBI, PNB, BoB, Canara Bank, Union Bank of India and Bank of India will be infusing capital and will have stakes in the bad bank. Meanwhile, private banks like Axis Bank, ICICI Bank and LIC-owned IDBI Bank are investing in this bank. Other non-banking stakeholders in the new bank will be Power Finance Corporation (PFC) and Rural Electrification Corporation (REC).
All the 11 shareholders will hold around 9% share and no one will hold more than 10% share.
The bad bank will allow more shareholders to join in a later day.
During the Union Budget for FY22, Finance Minister Nirmala Sitharam proposed a bad bank to reduce non-performing assets (NPAs) in the system.
“The Reserve Bank of India (RBI) wanted this ARC to fit into the existing structure for these companies. After consultations, care has been taken that there is no special treatment for this entity,” another source said. “For example, RBI was sceptical of the 15:85 structure. To address that, the government is guaranteeing security receipts (SRs). RBI wanted a market-determined price discovery; so we have adopted the Swiss challenge method to ensure robust price discovery.”
SRs are issued by ARCs to banks during the purchase of bad loans. They are redeemed at the time of recovery of the loans. Under the Swiss challenge method, new bidders are allowed to better an initial bid following which the first bidder is given a chance to either match or improve on the highest bid. Banks have blocked the domain name National ARC, logging a request for government approval.
“Although there are still some things that could be tweaked, it is certain that public sector banks will hold a majority stake in the ARC. However, the asset management company (AMC) that will manage these assets will be majority controlled by the private sector, although the large public sector banks that own the ARC may also hold stakes,” the second person cited above told the publication. “The AMC will have a Rs 100-crore capital base, and a lot of Indian and foreign investors are keen on a stake in this AMC.”
The ARC will transfer the bad loans to a step-down AMC, which will manage the assets for sale.
Bankers want to keep this AMC in the private sector to avoid unnecessary investigation from probe agencies and speed up decision making. Keeping the AMC in the private sector will also help offer competitive remuneration and get the best talent for the complex job.
About 60 assets have already been identified for sale. These include legacy power, EPC and infra assets that don’t have too many potential buyers despite high provisions. PFC and REC are on board because they control a large chunk of this debt.
“Of the assets identified, we have picked NPAs where 75% or more of the debt can be aggregated from the shareholders because of the maximum provision,” the second person said.