Coming down heavily on the finance minister's move, Bank of Baroda chairman K Kannan said: "The asset-reconstruction companies could be nothing more than a farce. Banks could create a separate company and transfer all their NPAs to this company and cleanse their balance sheets by a mere book entry. The asset value less the provision will be transferred to this sister company, while the provision will be written off."

"It defeats the very purpose of recovery of funds sunk in these NPAs. For this, the DRTs will have to aid in the recovery of these funds, which will not be possible till theyare given more powers," he added.

ICICI Bank executive vice-president PH Ravikumar pointed out that the budget is silent on how the ARCs will be financed. "Most probably the financing will be through some kind of special bonds, but who will subscribe to these if they are not accompanied by government guarantees? An alternative would be the issue of SLR bonds, which could compel institutions to subscribe," he said.

Central Bank chief KC Choudhary said one way of setting up the ARC could be issuance of long-term bonds backed by government guarantees. The Narasimham Committee had recommeded the setting up of an ARC for banks with high non-performing asset portfolios which can then issue "swap bonds". This had been suggested as an alternative to the asset-recontruction fund (ARF), which had earlier been recommended by the first Narasimham panel on financial-sector reforms set up in 1991. The government had earlier rejected the idea of setting up an ARF as it was not considered feasible.

The Madras-basedIndian Bank is likely to be the first to set up an ARC as it leads the pack with net NPAs in 1996-97 at 25.24 per cent, United Bank follows with 18.70 per cent, Allahabad Bank at 14.84 per cent, Central Bank at 14.40 per cent and UCO Bank at 13.73 per cent.

Other banks that are likely to follow are State Bank of Hyderabad at 11.42 per cent and State Bank of Indore at 11.29 per cent.

The committee had said that all loan assets in the doubtful and loss categories should be identified and their realisable value determined. These assets could then be transferred to an ARC. The ARC would issue NPA swap bonds to the banks for the realisable value of the assets transferred. "But it is doubtful that banks will get the entire realisable value of the assets transferred and the government might have to come in with more funds," a banking analyst with an investment bank said.

"In case the banks themselves decide to set up an ARC, it would need to be ensured that the staff required by the ARC is made available to itby the banks concerned either on transfer or on deputation basis so that the staff with institutional memory on NPA is available to the ARC and there is also some rationalisation of staff in the banks whose assets are sought to be transferred to the ARC," the panel had recommended.