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Govt to set up ARC to combat bank NPAs

George Iype in New Delhi

In his fifth Budget next week, Finance Minister Yashwant Sinha will announce the formation of an asset recostruction company on the lines of a similar company that the Chinese government has set up to lure foreign investors.

Already global consultants Ernst and Young has made a couple of presentations to the top officials of the finance ministry on the need for ARC that is exclusively intended to tackle the huge non-performing assets lying with Indian banks.

Jack Rodman, Asia-Pacific director of Ernst and Young led the presentation. It was Rodman, who helped China to set up Huarong Asset Management Corporation.

Rodman who also met Sinha pointed out that there are close similarities between the state of the financial systems of India and that of China.

Officials at the finance ministry said that the establishment of ARC is part of the restructuring process of the banking system undertaken by the government in the last few months.

Last week, the Reserve Bank of India allowed 49 per cent foreign direct investment in private sector banks in India, and Sinha is expected to move a bill on the formation of the ARC in the Budget session of Parliament.

The need for forming an ARC stems from two factors:

First, the non-performing assets of the Indian banks have touched a whopping Rs 570 billion.

Second, Sinha feels that the setting of ARC is signification from the point of the second generation reforms that he is carrying out.

Officials said that the specific details of the new company are yet to be worked out. The government is, however, planning to rope in a clutch of financial institutions to be part of the proposed company.

Already, financial institutions like the HDFC, LIC and ICICI have expressed their keen interest in picking up stake in the asset reconstruction company.

The finance ministry officials will also meet with the heads of the Asian Development Bank and the International Finance Corporation to be equity partners in the asset management company.

Officials said the proposed ARC will considerably push India as a favourable investment destination because foreign companies will be eager to partner with local Indian firms to purchase and fruitfully utilise the non-performing assets of banks.

It is not yet decided whether the Indian government will be an equity partner in the new venture.

Officials say the government wants ARC to be formed with private equity partners, and Ernst and Young will be awarded the contract to officially assist the government to set up the company.

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