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Verma Panel on bank rehabilitation favours ARCs - Views on News from Equitymaster
 
 
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  • Aug 20, 1999

    Verma Panel on bank rehabilitation favours ARCs

    According to newspaper reports, the Verma Committee is likely to recommend the setting up of Asset Reconstruction Companies (ARCs) to cleanse the balance sheets of banks that are on the recovery path. The committee was constituted to study the financials of Indian Bank, United Bank of India and UCO Bank and suggest measures to make them viable on a sustained basis.

    From the point of view of capital adequacy, the committee is likely to recommend a total infusion of Rs 40-50 bn in these banks.

    The asset reconstruction company that may be set up will buy out the bad loans from the banks at an agreed upon price. This will clean the balance sheet of the banks, while the ARC will recover its investment by recovering the loans from the borrowers over a period of time. Moreover, the capital infusion will enable the banks to expand their operations and overcome any liquidity crunch that they may be facing at the time.

    However, these measures fail to address the concern that despite the bailout these banks may not pursue prudent banking policies. These measures could generate a feeling of 'moral hazard', whereby banks pursue their activities irresponsibly, being aware of the fact that the government would be there to bail them out.

    Unless there is a method of penalisation, it is yet uncertain whether banks would make an effort to improve their operations. These measures only pertain to the 'survival' issue and not to the 'sustainable' issue. What is required is a setup whereby the step by step progress of these banks will be monitored, on the basis of which they will be eligible for the rehabilitation program. In the absence of such a program, it will not be surprising to find the same banks approaching the government for a bailout in the near future.

     

     

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