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The Finance Minister, Mr Yashwant Sinha, with (from left) the SBI Chairman, Mr Janki Ballabh, the HDFC Chairman, Mr Deepak Parekh, and the CII President, Mr Sanjiv Goenka, at the Banking Summit 2002 in Mumbai on Monday.

MUMBAI, April 1

THE proposed Asset Reconstruction Company (ARC) for taking over of bad debts, is not a "disguised mechanism to put public money into the balance sheet of banks" but one that was designed to play a vibrant and energetic role in handling distressed debt, the Finance Minister, Mr Yashwant Sinha, said on Monday.

Explaining the concept of ARC, the Finance Minister said, "We are not engaged in window dressing. The ARC will strike at the root of the structural problem by consolidating debt which is scattered, engaging in innovative corporate finance such as mergers or sale of brands or plants, injecting new capital, converting a distressed company into a profitable one and even taking it for an IPO."

Addressing a gathering of bankers at the Banking Summit 2002 organised by the CII here on Monday, the Finance Minister said the ARC is partly a question of specialisation, certain entities, banks and non-banks, can build a specialised competence in processing distressed debt and other creditors can choose to outsource the handling of distressed debt by selling of loans or bonds to these specialists.

Emphasising the need for taking action against wilful defaulters, Mr Sinha narrated the story of "an entrepreneur who comes to the bank in a Maruti for a loan and returns a year later in a Mercedes to tell the bank he cannot repay it."

Referring to priority sector lending, the Minister said that continuing social responsibility of bank to lend 40 per cent towards the priority sector would continue.

"I believe that it would be undesirable for banks to veer away from this social obligation and it is not entirely a bad business proposition as the self-help group experience has shown us," he added.

He said the Indian economy is showing signs of revival with the third quarter of the last fiscal witnessing a growth rate of around 6.3 per cent.

"The growth has been mainly on account of the value addition in the agriculture sector. The kharif and rabi crops have been good," he said.

Mr Sinha said, "We can certainly look forward to better days with the international situation changing for the better. Though there exists some weaknesses in certain sectors, I am confident that this year will be far better than the previous year."

Responding to a question on the likely movement of interest rates in India in the international context, particularly in the US, Mr Sinha said that interest rates in the US had reached their rock-bottom. "Unlike India, there is no room for rates to fall further in the US," he said. He said expects the interest rates continue to remain soft.

Speaking on his vision of Indian banking, Mr Sinha said India has the finest financial brains in the world and an intuitive understanding of money and banking. He said he had no doubt that banks in India could become "world- class."

Mr Sinha said that though the general assumption was that regulatory reforms would bring structural reforms along with it, this has not happened in India. Citing an example, he said that today most public sector banks are investing heavily in Government securities instead of lending actively to the corporate or the agriculture industry.

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