Govt's 5-pronged strategy on bad loans has near-term challenges

The five-pronged strategy recommended by the panel of bankers for resolution of bad loans is a useful long-term concept, but tighter deadlines and near-term funding challenges remain, say experts.

In its much-awaited draft recommendations, on Monday evening, the Punjab National Bank Chairman Sunil Mehta-led panel of public sector bankers suggested against setting up a bad bank. Instead, they came up with a five-pronged strategy to resolve non-performing assets (NPAs), depending on the amounts of stressed assets.

The panel presented the report titled 'Sashakt' to the interim finance minister Piyush Goyal. They suggested the resolution of non-performing assets (NPAs) through an independent AMC to tackle large loans of over Rs 500 crore, and also recommended that SME loans be resolved within 90 days.

“The basic questions still remain on who will bring in the money and at what discounts will the assets be sold...Lots of ifs and buts and moving parts.., deadlines also look tight but it should help later,” Karthik Srinivasan, Senior Vice-President at ICRA Ltd.

“If setting up of this AMC is looked at as a solution to today’s problem, then maybe no (it may not work), but 2-3 years down the line, banks will not have to wait till they (assets) go bad and can sell them at a better price at the first sign of problems...Once the system is set in place, it may help but at current levels, the hair-cuts will remain large,” he added.

Abizer Diwanji, Partner, and National Leader - Financial Services, EY India, says the entire process will at least take another 3-6 months to kick start but believes it is in the right direction.

Any resolution requires aggregation of debt to get a better price, skill-set to resolve it and the capital required from outside of the banks.

“All of which is part of this structure...Funding challenge existed because of aggregation. “This will make sure maximum value is gained by the bankers and strong capital underwriting, so it brings much more process to work on, I believe funding should happen,” he adds.

The 5-pronged strategy

1. Smaller assets up to Rs 50 crore: Banks should devise templated resolution approaches for different types of assets. The resolution should be completed within 90 days

2. Mid-sized assets between Rs 50 - 500 crore: Inter-creditor agreement to authorise the lead bank to implement a resolution plan in 180 days

3. Large NPAs above Rs 500 crore with potential for a turnaround: Asset management company/alternative investment fund (AMC/AIF) approach to raising funds and be market makers.

4. Assets under NCLT/Insolvency and Bankruptcy Code process and failed in 2 and 3 approaches

5. Asset trading platform for both performing and NPAs

Some experts are wary that the stringent deadlines may limit the price discovery and that the 90-day period is an anomaly. They await more clarity on its implementation.

“Broadly, it covers Rs 8.3 lakh crore worth of assets,” said Vibha Batra, Co-Founder, and CEO at FairConnect Business Advisors. “The first two strategies look like old wine in a new bottle. A material change is the third approach for larger accounts of more than Rs 500 crore is feasible as it speaks of the true sale of NPAs and redemption of SRs (security receipts) within 60 days,” she added.

Additionally, given the scrutiny on bankers on their commercial decisions, a government non-interfering steering committee has also been proposed.

“Government needs to ensure there is a dedicated team focusing on the resolution and their KRAs (key result areas) are defined and also how they would be insulated from the decisions, otherwise it cannot work,” she adds.

AIF route

Also, the alternate investment fund (AIF) route maybe weak as it has several challenges in India not meant for stressed assets.

AIF route does not have SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act) powers like the AMC.

SARFAESI Act allows banks and other financial institution to auction residential or commercial properties to recover loans.

"Although AIF may have more flexibility in raising the long-term money it doesn’t have any tax advantage, a lot of costs are dead costs and can be more lucrative for equity funding and not debt, Batra said adding, it may be a non-starter if funding issues are not sorted.