The move to create an alternate resolution plan for distressed assets in addition to the bankruptcy code is a good idea. The plan, proposed by a panel of bankers, entails the setting up of an asset management company (AMC) —with equity contribution from banks, among others — to take over bad loans and an alternate investment fund to raise money from institutional investors.
Essentially, the proposed mechanism would relieve banks of their bad loans in the short run, while giving the assets underlying the bad loans more time to realise their productive potential, that can them be monetised to compensate those who fund the purchase of the bad loans from the banks.
The proposal entails immediate recapitalisation of the banks, so that they can provide for the haircuts they take, and regain the capacity to lend, to finance growth, which has started showing signs of strengthening.
A measured approach to clean up bad loans of banks depending on the sector, type of asset and the size of the company makes eminent sense. In the power sector, for example, defaults are mostly due to delayed or non-payments by failing state utilities that are unable to buy power from generators due to years of political patronage of theft and giveaways.
The problem is not with the generation project as such, but the political failure to reform the sector. There would be few takers for such stranded assets and the insolvency route will fail to get funds. An asset management approach would fare better, in which patient capital buys the assets and holds them till politicians find the courage to tell people that power cannot come for free, persuaded by a power crisis that is bound to materialise sooner rather than later.
The transfer of the asset to the AMC would rescue stalled projects from their promoters. Of course, the bank would need to take a haircut to bring down the cost of the project, taken over by the AMC, to a realistic level. Eventually, capital can also be returned to the government if the assets are sold at a premium. So, it is imperative for India to create a functional market for distressed assets.