Reading Comprehension for NABARD 2018: 07 May

Reading Comprehension for NABARD 2018: 07 May

Reading Comprehension for NABARD 2018: 07 May

Directions (Q. 1-10): Read the following passage carefully and answer the given questions.

Sale of bad loans to Asset Reconstruction Companies (ARCs) that had gained considerable momentum four years ago has halved over the past two years. From about `50,000 crore in 2013-14 and 2014-15, bad loans sold by banks to ARCs have fallen to `20,000 crore in 2015-16 and slipped further to `15,000 crore in 2016-17.
The RBI demanding a higher down payment and the ARCs stretching themselves thin on capital have been the main reasons. The primary task of the ARCs is to acquire, manage and recover bad loans. After a lacklustre beginning, banks started aggressively offloading their bad loans to these companies in 2013-14, lured by better pricing. This was thanks to deals done through the ‘security receipts’ (SR) route. Instead of taking an upfront cash payment, banks were willing to accept delayed payment in the form of SRs. ARCs made a down payment of a minimum 5 per cent of the agreed value and the balance 95 per cent was redeemed against the SRs, when the amount was finally recovered.
In August 2014, the RBI tweaked the rules and increased the upfront payment to be made by ARCs from 5 per cent to 15 per cent. This has impacted the returns for ARCs, which until then were able to make an internal rate of return (IRR) of 20-22 per cent on their investment.
The issue of insufficient capital also became more pronounced after the RBI’s directive on higher down payment. Being a capital-intensive business, ARCs have not been able to take on bad loans from banks at an aggressive pace.
There are about 21 ARCs currently with an aggregate capital of just around `4,000 crore. The bad loans in the banking system, on the other hand, are over `6.5 lakh crore.
But, one of the proposals in the 2016-17 Budget that recently came into effect seeks to ease capital raising for ARCs.
One of the main reasons for investors shying away from infusing capital into ARCs was the cap on single ownership. Earlier, no single investor could hold more than 49 per cent. Inability to have a controlling stake in the business led to tepid investor interest.
But, the recent amendments, which allow a sponsor or promoter to hold up to 100 per cent, have offered some respite to the ARCs.
The Economic Survey highlighted that the ARCs have found it difficult to recover much from debtors and the issue can be resolved by creating a ‘Public Sector Asset Rehabilitation Agency’ (PARA). The new entity can eliminate most of the obstacles currently plaguing loan resolution.
But industry players disagree. “I don’t think a public sector ARC can improve the recovery process substantially. But given that the Centre does not have sufficient funds to recapitalise PSU banks, its choices are limited,” says Nirmal Gangwal, Managing Director, Brescon Corporate Advisors, a corporate debt restructuring advisory firm.
He adds that allowing banks a second-time restructuring for the next two to three years may be a better option. But economic recovery will be critical for this to work.
  1. Why did investors eschew infusing capital into ARCs?
        (A) Because of a cap on single ownership
        (B) Because investors had no stake in controlling the business
        (C) Because there was no provision for reinsurance for ARCs
        1) All (A), (B) and (C)
        2) Only (A)
        3) Only (B) and (C)
        4) None of these
        5) Only (A) and (B)
  1. Why does the Economic Survey favour the creation of a Public Sector Asset Rehabilitation Agency?
        1) Because this agency will be an antonomous body
        2) Because it is very difficult for ARCs to recover much from debtors
     3) Because this agency can eliminate most of the obstacles coming in the way of bad-loans recovery
        4) Only 2) and 3)
        5) All 1), 2) and 3)
  1. Why has the sale of bad loans to ARCs halved over the past two years?
        (A) Because the RBI has fixed a higher down payment for ARCs
        (B) Because it is difficult for the ARCs to make increased down payment
        (C) Because ARCs do not want themselves to become insolvent
        1) Only (A)
        2) Only (B)
        3) Only (C)
        4) Only (A) and (B)
        5) All (A), (B) and (C)
  1. Which of the following statements is not true in the context of the given passage?
        1) The ARCs perform the task of acquiring, managing and recovering bad loans.
        2) Banks were willing to accept delayed payment rather than taking down payment.
        3) One of the proposals in the 2016-17 Budget seeks to ease capital raising for ARCs.
        4) At present there are just 21 ARCs with an aggregate capital of just around `4000 crore.
        5) None of the above
  1. What prompted the banks to offload their bad loans aggressively?
        1) Down payment of 5% of the agreed value
        2) Better pricing
        3) The pressure created by the RBI to clean the Balance Sheet
        4) Only 1) and 3)
        5) All 1), 2) and 3)

Answers:

  1. 5
  2. 4
  3. 4
  4. 5
  5. 2

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