LENDING & CREDIT | Cesar Tordesillas, India

India encourages banks to salvage junk assets

The Indian government wants has created new rules to encourage state-owned banks to salvage junk assets.

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.

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