The Chennai-based Indian Bank is likely to float the first ARC in which ICICI, HDFC and UTI will pick up stakes. "We are willing to put in Rs 10 crore towards the equity of the ARC. Other institutions may chip in," bank chairman S Rajagopal said. Finance ministry sources said these institutions are expected to make a presentation on the formation of the company shortly.

Indian Bank plans to transfer about Rs 1,500 crore worth of sticky loans to the company from its bad loans of nearly Rs 2,600 crore. "Most of these assets are backed by collaterals, and I don't see any problem in recovering these assets. A few years down theline the bank can buy back the assets," Rajagopal said.

United Bank of India chief Biswajit Chowdhury said his bank was willing to float an ARC. "We have given a proposal to the ministry. I am hopeful things will work out soon," Chowdhury said. After a gap of five years, the Calcutta-based UBI made a net profit in fiscal 1998. Indian Bank, UBI and Uco are three state-run banks which account for the largest quantum of bad loans.

The ministry is keen to kick off at least one pilot ARC project before the end of the current fiscal to tackle the growing incidence of bad loans in the banking sector. "We are hopeful most of the assets will be recovered once the legal system is overhauled and the debt-recovery tribunals (DRTs) are being given teeth," Rajagopal said.

The second Narasimham panel on banking sector reforms had recommended the formation of asset-reconstruction companies to clear the books of banks with a high bad loan portfolio. The finance ministry and the RBI are not too keen on implementing therecommendations on a large scale as they apprehend it might not be a solution as banks may rush to offload the sticky assets to ARCs which may not be able to recover bad loans. "If the pilot project succeeds, then the ARC concept can be institutionalised," sources said.

According to the Narasimham panel, the sticky assets could be transferred to an reconstruction company, which would issue to the banks NPA swap bonds representing the "realisable" value of the assets transferred."We will sell the assets at a discount and the ARC will be able to recover them...The bonds will have the SLR status," Rajagopal said.