The government is planning to set up an asset reconstruction fund (ARF) for the Indian Bank, which ran up losses that wiped out the banks equity capital.
Under the proposal, the sticky loans will be transferred to the ARF, after which the bank is expected to turn healthy.
The bank accumulated huge non-performing assets (NPAs) which were not being provided for. As a result, it had to make provisions for the past NPAs amounting to over Rs 1,300 crore at one stroke.
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In fact, the Reserve Bank of India (RBI) had detected this practice by the bank and had ordered it to make the provision, which was not adhered to.
The exact amount of the ARF is likely to be announced in the budget, which is also expected to make a provision for this.
However, the move faces opposition from the banking industry itself, with one section against a bank-specific ARF. It is pointed out that there are quite a few weak banks which could also do with an ARF, and therefore, it would be unfair for just one bank to get this benefit.
The setting up of an ARF for weak banks was mooted by the Narasimham Committee about five years ago. However, the proposal never took off and bankers are sceptical of the fund being constituted even now.
But, another section of the industry pointed out that once the sticky loans are shifted out of the banks books, there will be a turnaround. The bank, it is pointed out, has a strong retail banking base which will assist it to move back into the black, the bankers pointed out.
In fact, quite a few private and semi-government institutions will be able to utilise the banks branch network effectively to expand their operations, it is felt.
The issue that will come even after the ARF is set up is the price at which the banks assets will be transferred. The sticky loans will have to be transferred obviously at a discount, but arriving at the price will a contentious issue, a banker pointed out.
A section of the bankers, however, feel that the price of the asset should be based on the health category. It is felt that the exact price of the asset should be the value of the asset minus the provision made against it.