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21st of July 2018

Economy



Tackling bad loans under Project Sashakt is old wine in new bottle

Since February 2014, when RBI came out with a comprehensive framework for revitalising distressed assets in the economy, followed by a dozen more circulars with schemes like S4A, SDR, etc, RBI has been coming out with various initiatives every now and then. Finally, in February this year, it came out with a revised framework for resolution of stressed assets and repealed all other schemes like SDR, S4A and CDR- which existed since 2001. Notwithstanding all these initiatives, the non performing asset (NPA) situation has only been deteriorating in past few years rapidly.

Last month, the government had mandated three-member Sunil Mehta Committee comprising chairmen of three large banks to come out with a quick fix solution. The committee in less than a month's time has come out with Project Sashakt, with a five-pronged approach to tackle NPAs. However, whether the quick fix will have a durable effect will be known once implementation process is set in motion.

Let us scrutinise the five pillars of the project. First, SME Resolution approach (SRA) with loan size up to Rs 50 crore, which contribute Rs 2.1 lakh crore. Banks should devise template-based resolution approach based on simple metrics and define SOP for resolution. It should be non-discretionary and non-discriminatory. The headlines of a presentation on the subject scream to target a big boost to employment. Essentially, it makes one believe that SME NPAs can be addressed by a few templates, SOPs and review mechanism. Or is it intended to generate a feel good for a vulnerable section of society? By the way, any answer on who will bring in fresh money to revive the units?

Second, BLRA- Bank Led Resolution Approach for loans between Rs 50-500 crore. Pre IBC process with exposure of Rs 3.1 lakh crore. Financial institutions to enter into Inter Creditor Agreement to implement a resolution plan in 180 days. The lead bank will prepare a resolution plan including empanelling turnaround specialists and other industry experts. Lead bank would be responsible to execute the plan etc. sounds good, but does it ring any bell- CDR? - which was given a burial only four months back.

Third, AMC/AIF resolution approach for loans above Rs 500 crore, with a total exposure of Rs 3.1 lakh crore. Independent AMCs to be set up. AIF would raise funds from institutional investors. Price discovery through open auction. AMC/AIF will become market maker. Previously too, funds have shown their eagerness to tie up with large lenders. But the progress so far on ground has been far from inspiring.

In addition to above three, NCLT/IBC process to be followed for larger assets already with NCLT and any other assets not resolved by any resolution approach above. The final step is creation of an asset trading platform which was first mooted by RBI deputy governor Viral Acharya in last annual ARC Conference- Arcon, in Mumbai in January this year.

The diagnosis of the problem is correct. Inter creditor issues is a big challenge in resolution. In many cases, lenders fight against each other more than with a defaulter, who has the last laugh playing one bank against other. Solution to domestic bad money can only come from deep pockets with adequate risk appetite and risk capital available with global distressed funds. A trading platform will help price discovery and enhance liquidity.

But whether the present imitative can attract serious players to this clean-up process is a Rs 8.3 lakh crore question. To be fair, nobody can expect out of box thinking from a set of bankers who are struggling with their own NPAs, and to work out a solution with hands tied to the existing regulatory framework. The recommendations make a good reading on intent and a wish list which include operational turnaround to retain values and prevent job loss. It also speaks of a robust governance and credit architecture to prevent similar build up. And consolidation of stressed assets, freeing up management bandwidth to focus on credit growth. All this sounds dream come true. If the AMCs can address the issues like valuation, liquidity, incentives, governance structure etc, the present exercise may turn out to be a game changer and attract the big investors waiting in the wing to make debut after receiving right signals or else it will just be old wine in new bottle.

(The writer is an ex-banker and director of an ARC)

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