Lenders will have the option to transfer dozens of large stressed assets worth about Rs 2.25 lakh crore to the proposed asset reconstruction company (ARC) once it takes off, financial services secretary Debasish Panda said on Tuesday.
While the government backs the idea of setting up the ARC, or the so-called bad bank, for the resolution of bad debt and cleaning up of the lenders’ books, it will not provide capital for it. Instead, banks — both state-run and private — will put in the capital, he added. A detailed framework is in the works but banks feel the requirement of certain regulatory relaxation, which the central bank will look into.
Panda said the development finance institution (DFI), proposed in the Budget 2021-22 will have ambitious developmental goals and, unlike extant institutions like IFCI or IIFCL, its role will stretch well beyond the realm of mere project financing. State-run IIFCL, given its experience in project financing, could also be subsumed by this DFI.
Initially, the DFI will be wholly owned by the government, which has announced a capital infusion of Rs 20,000 crore. But the government is willing to dilute its stake to 26% once long-term investors come on board, the secretary said.
The National Bank for Financing Infrastructure and Development (NaBFID), as the DFI will be known, will facilitate project structuring, help in financial closure, foster innovation in financial products and play a catalytic role in financing projects under the Rs 111 lakh crore National Infrastructure Pipeline. Ultimately, it will also contribute towards deepening the country’s corporate bond market for infrastructure financing.
Asked about the names of the two state-run banks and the insurer that the government has proposed to privatise, the secretary said NITI Aayog will first draw up a list of entities. This will then be sent for vetting by a core group headed by the DIPAM secretary. Once this panel clears the proposal, it will be sent to the alternative mechanism headed by the finance minister for clearance. “Both PCA (stressed) and non-PCA banks can be candidates for sell-off. It’s hard to say now,” he said, when asked if only the stressed banks will be privatised. “Ultimately, the names will be selected through this process,” he added.
The government will amend the LIC Act, as it plans for its initial public offering, the secretary said. More than two dozen changes were required in the LIC Act to comply with the listing norms and distribute shares. DIPAM will recommend the quantum of the government’s stake dilution in LIC through the IPO, he said, amid speculations that it could be 5-10%.
The Centre will introduce a Bill to set up the DFI. Also, the IDBI Act will be repealed so that its banking licence is retained even after the government exits.
As for the resolution of bad debt, the secretary said an AMC will be set up within the broader ARC structure that will work out the toxic assets and take appropriate decisions, including on selling them off to investors.
Explaining the rationale behind the plan to set up a DFI when some of the earlier DFIs (ICICI and IDBI) struggled to remain viable and later morphed into banks, Panda said: “Earlier, the DFIs failed but they also served a purpose in terms of project financing.”
“We need patient capital in infrastructure. The corporate bond market for infra financing is at a nascent stage and needs to be deepened and investor base widened. Keeping all that in mind, it was thought that it would be prudent that a sovereign-backed DFI through a statute will give confidence to investors — sovereign wealth funds, insurance funds, pensions funds, etc — to invest,” he added. Plus, as the finance minister has said, the IDBI experience will be utilised for better results.