Indian Bank’s Association is considering a proposal from Sashakt panel for setting up an asset management company and Alternate Investment Fund (AIF) to acquire bad loans from banks with aim to turnaround those assets to protect and enhance value.
Public sector bank executive said the structure advised by Sashakt panel is being considered for an establishing vehicle, dubbed as bad bank, to park toxic assets in back in focus.
The coronavirus pandemic, which is expected to result in a rise in non-performing assets (NPAs) despite relief measures such as allowing a 90-day moratorium on retail loans and relaxing working capital financing norms.
In July 2018 committee report on Resolution of Stressed Assets, also called as Sashakt panel, headed by Sunil Mehta, had recommended formation of an independent AMC to acquire bad loans predominantly from public sector banks. The large assets with exposure above Rs 500 crore with potential for turnaround were to be dealt by AMC and AIF.
The groundwork for forming such a vehicle has been done, keeping in mind Indian regulatory environment and conditions in financial sector, Mehta told Business Standard.
While details are still being fleshed out for arrangements, the bankers want focus on “turning around” assets than just transfer asset to another legal entity, bankers said.
Care Rating analysis for Q3FY20 showed the gross NPAs (GNPA) of commercial banks had declined to Rs 9 trillion in December 2019 (Q3FY20) from Rs 9.7 trillion in December 2018 (Q3FY19), whereas the public sector banks continued to have lion’s share (Rs 7.2 trillion at end of of December 2019) in the total pool of NPAs.
The GNPA ratio for the PSBs stood at 11.3 per cent for the quarter under review as against 12.8 per cent in Q3FY19, reflecting an increase in provisioning.
State Bank of India chairman Rajnish Kumar last week had said this is the right time for a structure along the lines of a bad bank as the provisions on the existing NPAs - most of the banks are holding a very high level of provisions.
Banks have been making hefty provisions for bad loans after asset quality review kicked in 2015-16. As a consequence, the provision coverage (PCR) ratio of banks has also seen improvement. The average PCR of SCBs stood at 71.6 per cent at the end of December 2019, against 65 per cent in the year-ago period reflecting an improvement in the financial health of the SCBs.
Sashakt panel had recommended said AIF would raise funds from institutional investors, and banks have an option to invest if they wish to participate in the upside. The price discovery through open auction by the lead bank – all ARCs/ AMCs/ other investors are free to bid.
The AMC/AIF will become a market maker and thereby ensuring healthy competition, fair price and cash recovery. The AMC/AIF will conduct operational turnaround of the asset by itself or by engaging with an external party. This AIF can also bid for assets in the NCLT and thus play a broader role in resolutions, panel said.