The SME financing institution Small Industries Development Bank of India (SIDBI) is soon going to start its asset reconstruction company (ARC). The bank hopes to commence this new foray by the end of March 2009.

An Asset Reconstruction Company is registered as Securitization or Reconstruction Company with the RBI. The company is filed under the SARFAESI Act to carry out reconstruction business of banks' non-performing assets (NPAs).

SIDBI Chairman and Managing Director R M Malla said, "We have applied for Reserve Bank of India (RBI) approval and hopefully we should have the regulatory clearances in a month or two." The ARC should begin its operations by the end of the current fiscal subject to the regulatory approval, he added.

A subsidiary named India SME Asset Reconstruction Company (ISARC) with the initial paid up capital of Rs 1 crore has also been incorporated, informed Mr Malla.

The firm will primarily focus on acquiring loans for the SMEs whish are currently facing a heat of credit crunch.

SIDBI will be a lead partner holding the maximum stake of 26% in the company. The remaining stakes of the firms will be held by 10 public sector banks, LIC and 2 state finance corporations.

"We have got some very good partners like Punjab National Bank, Bank of Baroda, Canara Bank and United Bank of India," said Malla.

Public sector banks that extended to SMEs accounted over Rs 8,000 crore as non-performing loans. In 2006-07 there were about 4,000 crore of NPAs in the industry.

Recently SIDBI has invited Expressions of Interest (EoIs) from consultancy organizations in order to allow the company to fix the Basel II compliant integrated risk management system in all its operations.

Malla told that the consultant would have to analyze the entire risk management framework of SIDBI and suggest, design and implement approved Basel II compliant bank-wide integrated risk management systems.

This would include necessary alteration of the existing risk management systems for credit, market and operational risks, providing necessary training to SIDBI officials, documenting the entire jobs that are carried out and providing suitable reference manuals to the bank, he added.

SIDBI has recently signed a loan agreement with Japan International Cooperative Agency (JICA) for Rs.1, 500 crore which is a part of Rs. 4,555 crore soft loan package that the Government of Japan agreed to extend to India.