No bank loan defaulter or those connected to a bank loan defaulting company should be a Director in an Asset Reconstruction Company (ARC) and the sharing of loan recovery structure should be changed, suggested All India Bank Employees' Association (AIBEA).
In its submission to the Reserve Bank of India (RBI) set up Committee on Functioning of Assets Reconstruction Companies, the AIBEA has stated the above in addition to several other suggestions.
The RBI had set up the committee to review the existing legal and regulatory framework for ARCs and recommend measures to improve them; review the role of ARCs in resolving the stressed assets issue; suggestions for improving liquidity in and trading of security receipts; review of business models of the ARCs and other matters relating to transparency and governance.
The AIBEA said, the ARCs buy the bad loans of banks along with the attached securities at a discounted value and sell them or recover them later and thus make profit.
When ARCs buys the bad loans at a discount, there is a loss to the banks. Hence the real effort should be to recover the bad loans by taking stringent measures against the defaulter borrowers. Bulk of the bank's bad loans are due from big corporate companies, AIBEA said.
Some of the suggestions made by AIBEA are:
1)ARCs shall have to be formed by the group of public sector banks and their management should be handled by the experts in credit and recovery.
2) Foreign Institutional Investors (FIIs) and other private agencies should not be allowed to run ARCs as their motive is only profit and thereby the Public Sector Banks would be left in the lurch with purchase of loans at a steep discount and the realisation of assets for ARCs would be much more.
3) ARC Promoter has to bring in sizable capital to show their commitment in the business.
4) The present practice of Security Receipts of ARC being subscribed by NPA selling Banks need to be modified.
5) ARC Management fee has to be in-line with market trends and the same should be negotiated by Banks.
6) The present system of sharing recovery on Water Fall structure has to change. At present, ARC recovers first its legal and resolution expenses and then Management fees and thereafter theArecovery is shared in the agreed ratios. This needs to be changed to proportionate sharing of all the items so as to keep the ARC driving recovery.
7) With the Bank normally providing up to 100 per cent of bad debts within four years of the loan identified as NPA, the NPA selling Bank has to transparently place all the details pertaining to transfer of Bad debts to ARC with its efforts so far to recover the bad debts and the justification for selling it to ARC with reasons and expected timeline for recovery.
8) Minimum owned funds of ARC should be increased substantially.
9) Disclosures by ARC in their financial statements/ Balance sheet and also by NPA selling banks in their Balance sheet should include more information with regard to as on date status ofArecovery measures, likely erosion in value of securities due to stress on account, delay in resolution with passage of time and further proposed steps.
10) Internal Audit of ARC should be carried out by firms not connected to promoters/owners and or to the connected parties. They should not be connected to the NPA selling Banks and their parties.
11) ARCs should not be allowed to undertake activities other than managing Bad Loans/NPAs.
12) Buy back of Restructured assets by banks from ARC should be on stricter norms and purely on merits based on various factors.
13) Redesigning the NPA auctions to bring in equitable share of risks between Banks and NPA buyers is required.