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Jaitley, Urjit Patel to discuss NPAs, ´ bad bank´ today

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Finance Minister Arun Jaitley will holdameeting on Friday with Reserve Bank of India (RBI) Governor Urjit Patel and other top central bank officials to discuss the burgeoning toxic asset levels in the banking system and to draw upapossible structure ofastateowned ´bad bank´ or asset management company (AMC) that will take over nonperforming assets (NPAs) and enable banks to clean up their balance sheets.
Also, issues such as how much ofahaircutabank must undertake in different stress account cases and the state of existing asset reconstruction companies (ARCs) will likely be discussed, Business Standard has learnt from finance ministry and RBI sources.
The meeting will happen over video and will be attended by Patel and all RBI deputy governors.
While the ´bad bank´ or AMC will be largely in line with what the RBI Deputy Governor Viral Acharya has proposed, officials in the RBI and the finance ministry´s department of financial services are working on its possible structure.

Sources said two proposals were being worked upon.

The first involves setting up an AMC in which the Centre holdsa49 per cent stake, with private funds and investors holding the rest. This structure is similar to the National Investment and Infrastructure Fund (NIIF).
The second proposal envisages expanding the scope of the ~40,000 crore NIIF to take over the toxic assets.
“Apresentation is being prepared on these proposals for the finance minister and the RBI governor.

Only after they have taken some decisions will the proposals go the Prime Minister´s Office,”agovernment official said.

The total gross NPAs of banks in December 2016 was more than ~6 lakh crore.

Estimates suggest the total stressed assets put in various baskets of technicalities are at least 12.5 per cent of banks´ total loans, or about ~9.5 lakh crore.

More than half of the present stress came to the fore after the RBI´s asset quality review last year.

Acharya had proposed two AMCs,aprivate one to handle cases that could be turned around quickly andaquasigovernment AMC for projects that needed nurturing foralong time.

According to an official at the central bank, Jaitley wants serious discussions on the issue.

“The government for long has been trying to floata ´bad bank´.

The deputy governor´s ideas are worth considering in that respect,” said the official.

The minister was also expected to discuss the state of ARCs and might reexamine their capital requirements, said the source.

Besides, banks´ reluctance to sell assets to these companies atafair price would likely be discouraged.

“If banks are not able to recover dues inatimebound manner, then there is no point in holding on to the assets.

This eats up precious capital,” said the official.

However, all will boil down to how much ofahaircutabank should take in case of stressed asset restructuring.

Acharya had suggested ifabank was not able to dispose assets quickly,atime correction should be allowed.

This could be one of the main discussion points in the meeting.

In the 201617 Economic Survey, Chief Economic Advisor Arvind Subramanian had proposed the setting up ofaPublic Sector Asset Rehabilitation Agency, to take over toxic assets not only of banks but also directly from companies.
Business Standard New Delhi,10th March 2017

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