The Reserve Bank of India may allow banks and financial institutions to transfer sticky assets to the proposed asset reconstruction company more than the 40 per cent cap that was stipulated in the draft guidelines.

These guidelines, released in December, capped the amount of assets that could be transferred at 40 per cent of the net worth of the bank or the financial institution.

At a meeting with senior bankers on Monday, the RBI brass indicated that this limit could be relaxed on a case-to-case basis. This is of enormous significance as banks and institutions can transfer a higher amount of sticky assets to the ARC now.

On December 31, 2002, ICICI Bank's net worth was Rs 7,113.49 crore (Rs 71.13 billion). The net worth of State Bank of India and Industrial Development Bank of India were to the tune of Rs 15,224.38 crore (Rs 152.24 billion) and Rs 6,654 crore (Rs 66.54 billion), respectively.

All three institutions have already identified the assets to be transferred to the ARC which is set to take off before the end of the current fiscal year.

The RBI may also ease the time frame given to write off the difference between the value of the assets and the price at which the ARC will buy it out from a bank or institution.

For instance, if a bank has written down a Rs 100 crore (Rs 1 billion) asset to Rs 70 crore (Rs 700 million) on its books and the ARC is buying it at Rs 30 crore (Rs 300 million), the bank is required to write off Rs 40 crore (Rs 400 million) within one year. Now, RBI may relax the time frame beyond one year.

Going by the draft guidelines, the ARC will be allowed to acquire even standard assets, but are likely to get into distress assets at a later date.

The guidelines, however, make it clear that the ARC cannot change or take over a company's management.

The company can reschedule debt payments by a borrower, enforce security interests in the financial assets in accordance with the provisions of the securitisation law, settle dues payable by the borrower and take possession of secured assets in accordance with the provisions of the law.

The ARC will be subject to periodic audits and checks by internal or external agencies. Within five years from the date of acquisition, the company will have to reconstruct the assets and realise the value of the assets.

The assets taken over by asset reconstruction companies will be classified into standard assets and non-performing assets.

The latter, in turn, will be classified as "sub-standard" assets for 12 months, "doubtful" for over 12 months and "loss" for over 36 months or if the asset is potentially non-recoverable owing to an erosion in the security value or non-availability of security.

An NPA can be upgraded to a performing asset, based on satisfactory performance over a period of 12 months.