In its much-awaited recommendations, a panel of public sector bankers has suggested against setting up a bad bank and instead came up with a five-pronged strategy to resolve non-performing assets (NPAs), depending on the amount of stressed assets.
The strategy to deal with NPAs included banks setting up a dedicated vertical to deal with smaller stressed assets of less than Rs 500 million, inter-creditor agreements to deal with loans between Rs 500 million and Rs 5 billion, and setting up asset management companies (AMCs) for loans above Rs 5 billion, with money raised through alternative investment funds (AIFs).
It also suggested resolving bad debts under the Insolvency and Bankruptcy Code (IBC) and setting up a trading platform for assets.
Experts found the strategy incremental, but said efforts were being made to create a market for assets first, which is commendable.
The recommendations have been accepted by the government, Union Finance Minister Piyush Goyal told reporters.
The panel, led by Punjab National Bank Non-Executive Chairman Sunil Mehta, suggested an independent AMC with a minimum capital of Rs 200 million.
Then, an AIF will be created to raise funds from foreign and institutional investors. Banks have an option to invest if they wish to participate in the upside.
The price discovery of these NPAs will be through open auction by the lead bank, and in it asset reconstruction companies (ARCs), AMCs and other investors will be free to bid.
“This AMC, AIF will become a market maker and thereby ensuring healthy competition, fair price and cash recovery. Security Receipts (SRs) will be redeemed within 60 days. The AMC/AIF will conduct an operational turnaround of the asset by itself or by engaging with an external party and can also bid for assets in the NCLT and thus play a broader role in resolutions,” the presentation said.
The panel, which has State Bank of India Chairman Rajnish Kumar as a member, met for 11 hours on Monday before submitting its recommendations to the minister. Goyal, while presenting the panel’s recommendations on Monday evening, said the steps suggested would be compliant with the insolvency and bankruptcy process as well as Reserve Bank of India (RBI) regulations, and would be free from government intervention.
The panel also suggested a transparent asset-trading platform among banks to trade in solvent as well as toxic assets.
For NPA accounts of less than Rs 500 million, banks will now set up dedicated verticals and have well-defined and time-bound standard operation procedures to deal with such loans. These loans will require to be dealt within 90 days. Goyal said the aim of this approach was to ensure there were no job losses and disruption to small and medium enterprises.
“Since the resolution will be under a single bank’s control, we have recommended an approach that would be customised at individual bank level,” the panel said.
Additionally, banks will also put in place a robust monitoring and review mechanism to track resolution with clear escalation metrics for breaching timelines.
For loans between Rs 500 million and Rs 5 billion, which usually involves a consortium of lenders, the panel has recommended that the lenders sign an inter-creditor agreement to come up with a resolution plan in 180 days. The lead bank will prepare a plan, which will be based on advice from a panel of turnaround specialists.
“Just like in the bankruptcy process, if at least 66 per cent of the lenders approve the turnaround plan, it will be accepted. In case the lead bank is unable to complete the resolution process within 180 days, the asset would move to the National Company Law Tribunal,” Goyal said.
Large banks will help smaller lead banks run the process if required. Independent screening committees of eminent personalities will be appointed by the Indian Banks’ Association to validate due process within 30 days at the outside, the panel said in the presentation.
Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services, said the recommendations were not radical.
On the AMC-AIF approach, he said the process amounted to shifting assets from the banks' balance sheet to the treasury. "And if there is participation by banks, there will be conflict of interest," he said.
However, he said there were efforts to create a market first amid a huge supply of stressed assets.
A banker said the strategy, particularly relating to small-size stressed assets, would create jobs.
As of March 31, 2018, bad loans across listed banks stood at over Rs 10 trillion.
According to the RBI’s recently released Financial Stability Report, the gross NPA ratio is set to rise by March 2019 to 12.2 per cent from 11.6 per cent in March 2018.