Govt unveils plan for banks’ stressed assets
The government and banks on Monday unveiled a new strategy to revive stressed assets outside the Insolvency and Bankruptcy Code (IBC), including through asset management companies (AMCs) and investment funds that are expected to help lenders generate better value, while cleaning up their books to enable further lending.
The plan includes a thrust for loans of up to Rs 50 crore given to small and medium enterprises as well as mid-segment loans of up to Rs 500 crore. A special focus will be on loans of over Rs 500 crore, where the plan is to use independent AMCs, which could be set up by banks and other investors to manage assets acquired by the asset reconstruction companies (ARCs) to nurse them back to health and generate value when the market improves.
A second element of this plan is to rope in alternate investment funds (AIFs) that will provide capital support to the ARCs and the AMCs to acquire the entire loan from all banks as opposed to the current practice where a handful of lenders sell the stressed assets to ARCs. The proposed structure, which may kick off soon, is expected to help banks generate cash instead of securities with five-six year maturity that are currently issued by ARCs, Piyush Goyal, who is officiating as finance minister, said at a late-evening press conference.
A committee of bankers, that included PNB chairman Sunil Mehta, SBI chief Rajnish Kumar and Bank of Baroda managing director P S Jayakumar, submitted the report on resolution of stressed assets on Monday. Apart from resolution approaches for small, medium and large loans, the panel set up last month also recommended that assets that are not resolved within the RBI-stipulated 180-day deadline be sent to the National Company Law Tribunal for action under the IBC.
It has also suggested an asset-trading platform for banks to trade in performing as well as non-performing loans. While the idea of AMCs and AIFs was proposed by the banks, it is also seen to have the encouragement and support of Goyal. The plan addresses the concerns of the finance ministry bureaucracy as it will not entail any obligation on the exchequer and has been structured within the current regulatory remit.
This is a key policy initiative taken during Goyal’s stint and the minister said the report has been accepted, paving the way for implementation over the next few weeks.
The key focus of the report was on around 200 large loans of over Rs 500 crore that were spread across multiple banks and were affected by fragmented decision-making, limited capital base of ARCs and the current model of security receipts or instruments that offer payment to banks over along period.
BoB’s Jayakumar said, “Now, the entire loan can be sold and we will be able to get cash and generate better value during the sale and also get an upside later.” Bankers, however, said the valuation exercise under the new mechanism will take time to evolve, given that cash will have to be paid upfront.
Goyal said the proposed AMCs will become a marketmaker and ensure healthy competition. “The government will not intervene in the resolution process, which would be entirely led by banks,” he said, adding that most of the banks have already expressed their interest in the recommendations. Sunil Srivastava, who was until recently involved with large loans as SBI deputy MD, said, “Loans above Rs 500 crore are real assets whose values have been depressed on account of various factors and most ARCs do not have the capital to buy 100% of these assets at their discovered values. Perhaps the new approach will lead to a faster cleaning up of loans books and may help capture the upside by allowing banks and others to participate in the AIF.”