What is Govt’S 5-Pronged Strategy on Bad Loans? It Has near-Term Challenges (Important) (Download PDF)

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5-pronged strategy recommended by panel of bankers for resolution of bad loans is useful long-term concept, but tighter deadlines & near-term funding challenges remain. For scrutiny on bankers on their commercial decisions, govt. non-interfering steering committee is proposed.

Image of Project Sashakt

Image of Project Sashakt

Image of Project Sashakt

5-Pronged Strategy

  • Smaller assets up to Rs. 50 cr. : Banks should devise templated resolution approaches for diff. types of assets. Resolution should be completed w/I 90 days

  • Mid-sized assets b/w Rs. 50 - 500 cr. : Inter-creditor agreement to authorise lead bank to implement resolution plan in 180 days

  • Large NPAs above Rs. 500 cr. w/potential for turnaround: Asset management company/alternative investment fund (AMC/AIF) approach to raising funds & be market makers.

  • Assets under NCLT/Insolvency & Bankruptcy Code process & failed in 2 & 3 approaches

  • Asset trading platform for both performing & NPAs

Analysis of Government Strategy

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

  • It covers Rs. 8.3 lakh cr. worth of assets.

  • 1st 2 strategies look similar to old strategies. Material change is 3rd approach for larger accounts of more than Rs. 500 cr. is feasible as it speaks of true sale of NPAs & redemption of SRs (security receipts) w/I 60 days.

  • Govt. needs to ensure there is dedicated team focusing on resolution & their KRAs (key result areas) are defined & how they would be insulated from decisions, otherwise it cannot work.

Alternate Investment Fund AIF Route

  • 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 & Reconstruction of Financial Assets & Enforcement of Securities Interest Act) powers like AMC (Asset Management Companies).

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

  • AIF may have more flexibility in raising long-term money it doesn’t have any tax advantage, lot of costs are dead costs & can be more lucrative for equity funding & not debt, it may be non-starter if funding issues are not sorted.

- Published/Last Modified on: September 14, 2018

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