Let CRAs endorse NPAs, banks focus on building credit

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The recently formed ARC committee also made several recommendations to incentivize early stage bank selling to ARCs to maximize value. However, there have been question marks over asset prices. The pricing of an asset is a function of the interaction of various operating dynamics. An asset could be valued at X, by a desktop valuation. When an ARC proposes to acquire it, it will take into account the amount actually achievable, the completion time given long litigation, and the cost of its capital. So, essentially, the price the CRA will pay must cover the time value of money and the operational risks involved in realizing an asset, more so than in the event of distressed debt whose value is erodes quickly, and many uncertainties must be addressed before an asset is resolved.

The transfer of loans is done through a competitive process with the Swiss challenge method. The purchase price reflects the price discovered through an elaborate and well-established auction process. Article 32 of the SARFAESI law grants immunity for acts performed in good faith without malicious acts or intent. “No suit, prosecution or other legal proceeding may be brought against the Reserve Bank or the Central Register, or against any secured creditor or one of its agents for any act done or omitted to be done in good faith by virtue of of this law. “

ARCs, the quintessential bad banks, can help commercial banks focus on taking out good loans. Credit creation and GDP growth have a positive correlation. Stress-free banks can then focus on expanding needs-based financing to help India meet an economic target of $ 5,000 billion.

(The author is a contributing columnist. Opinions are personal.)


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