India wants to establish a mega-asset manager to tackle its bad loan problem

Each year brings a new plan from the Indian government that is squarely aimed at giving the country’s banks a lifeline as they deal with a worsening bad loan problem.

Last October, it was the initiative to pump ₹2.11 trillion worth of funds into the state-owned banks, the balance sheets of which comprise the major portion of India’s bad loans. The plan has been criticised for not being sufficient to support a growth in lending and mainly helping these banks with their regulatory capital requirements.

This year, it’s Sashakt, a scheme for the resolution of assets, as announced by interim Finance Minister Piyush Goyal yesterday.

Unlike the recapitalisation plan, this isn’t a bailout and will not require any easing of restrictions from the Reserve Bank of India. It also forgoes the option of establishing a bad bank.

The action points for this plan were actually drafted by a government-appointed committee of bankers led by Sunil Mehta, the chairman of the scam-embroiled Punjab National Bank.

Here are the main proposals of the scheme:-

A national asset management company

A national Asset Management Company (AMC) will be established to restructure large accounts - those involving sums larger than ₹5 billion. It will be receiving equity capital from foreign private equity firms, alternative investment funds and infrastructure funds. Banks will also be allowed to invest. The AMC will be privately-owned, although the government could take a minority stake in it through an investment fund.

Despite the government’s claim that it’s not creating a bad bank, the asset management company will function like one. It will consolidate all of the bad loans in one vehicle and focus on the liquidation and restructuring of the accounts.

However, unlike a bad bank where the loans are simply hived off into a separate vehicle under the aegis of the bank’s parent, the asset management company will have to bid for these accounts in an open auction. Hence, the owner of the stressed account will sell the loan for a price determined by the market and will be paid within two months. AMCs can also bid for assets listed by the National Company Law Tribunal (NCLT), a body mandated by India’s bankruptcy code to deal with large stressed accounts.

There could be multiple AMCs created if the need arises, Goyal reportedly said. An additional recommendation involved the creation of a trading platform for stressed assets as well as unstressed accounts.

Bank-led solutions for smaller accounts

For non-performing accounts that less than ₹500 million, banks will have to set up dedicated units to deal exclusively with the recovery of those accounts and come up with a resolution plan within 3 months of when the account becomes stressed.

For accounts in the range of ₹500 million and ₹5 billion, the lead bank has to develop a joint resolution plan with other creditors to the corporate entity within 6 months. The turnaround plan has to be approved by 66% of the creditors to go ahead. In the event that the 6 month-deadline isn’t met or the the creditor vote doesn’t pass, the account will be referred to the NCLT.