Indian banks have revived discussions on setting up an asset management company and an alternative investment fund of around Rs 10,000 crore to acquire bad loans, two years after the Sashakt panel made such a proposal.
The Indian Banks’ Association (IBA) is reconsidering the option of a so-called “bad bank” to restructure large distressed assets, said two people privy to the development.
“The conversation is back to what we at the Sashakt panel had recommended,” said Sunil Mehta, chairman of Project Sashakt, referring to a proposal the committee of bankers had first proposed in 2018.
“One of the imperatives is to set up an AIF, backed by an asset management company, to resuscitate the assets by getting in professionals in the space,” Mehta said. This is the “only suitable option” to manage the distressed assets that will emerge once the Reserve Bank of India’s three-month loan moratorium ends, he said.
“From my discussions, I believe the IBA is considering the same structure as recommended. What model and shape it will gather eventually needs to be seen but it cannot be disparate moves at this stage. No investor will come in if they cannot understand what the end game is and how the AMC will create value,” he said.
The government had in 2018 formed the Sashakt panel, led by former banker and chairman of Punjab National Bank Sunil Mehta, to help in the resolution of stressed assets.
In July 2018, the panel proposed a five-pronged approach to resolve stressed assets that amount to nearly Rs 10 trillion ($141 billion).
It proposed an independent asset management company for bad loans above Rs 500 crore. This AMC could be funded by AIFs backed by private equity firms.
In 2018, State Bank of India chairman Rajnish Kumar had said there could be multiple AMCs and sector-specific funds. Each fund could be in the range of Rs 2,000 crore to Rs 10,000 crore.
According to Mehta, the Sashakt panel’s recommendations should have been implemented two years ago. “Nonetheless, now we have to do it at breakneck speed to set up the funds. I believe it should be multiple funds as it’s a question of who brings in the seed capital to encourage other domestic and global investors to come in.”
Bankers say the coronavirus pandemic is likely to result in a rise in bad loans. The RBI has announced relief measures such as allowing a 90-day moratorium on retail loans and relaxing working capital financing norms.
Banks are also exploring whether to transfer loans under restructuring or those undergoing resolution in the National Company Law tribunal to the proposed bad bank.
