The government has approved a new scheme to address India’s enormous bad loans problem. The scheme, known as “Sashakt”, will divide stressed assets into three classes depending on their size. Non-performing assets (NPAs) of up to Rs 500 million will be managed by focused verticals within banks, which will ensure resolution within 90 days. For NPAs of Rs 500 million-Rs 5 billion, banks will enter into an inter-creditor agreement, authorising the lead bank to implement a resolution plan within 180 days. Those above Rs 5 billion will be dealt with by independent asset management companies (AMCs). It is possible that, for NPAs of smaller ticket sizes, the Sashakt mechanism, which includes bad loan trading between banks, might make resolution easier. But the road becomes uncertain for larger value loans, which are the most worrying for the structural stability of India’s financial system. While the AMC route is not a new solution to the problem of NPAs, it has not proved to be noticeably successful. The problem has not been the amount of money that these AMCs had access to; it is the lack of attractive assets at a reasonable price.
The AMCs will have some features of note. Initial equity will come in from banks, though private investors are supposed to hold “at least” 50 per cent. They will then set up alternative investment funds or AIFs, which will actually buy the assets being put on sale. The AIFs will be financed by banks and specialist stressed asset funds, including those with global operations. State Bank of India has estimated that the AIFs would need to raise about Rs 1.2 trillion. It is here that problems start creeping in. Will the AIF be able to raise enough money in time, particularly from the private sector? Will global investors be satisfied with the control structures of the AMC and the AIF? Even if they are, there are also serious questions about the appetite for such assets in the economy. Take, for instance, the NPAs related to thermal power plants. If there is no reason to believe that pricing reforms will happen, what is the point in delaying sending them to the insolvency process?
These uncertainties give rise to concerns whether the banks and the government will end up kicking the can down the road. In February, the banking regulator replaced a whole host of NPA-focused schemes with a leaner and swifter revised framework, which gave primacy to the Insolvency and Bankruptcy Code (IBC) process. The new scheme seems to be disrupting that effort. For several assets, the 180-day period before they enter the IBC process is expiring soon. It is impossible that any AMC or AIF can be set up within that timeframe; in fact, the consensus is that the process will take at least six months. The government has said that the new scheme will be aligned with the IBC, but the danger seems to be that it might end up having the opposite effect. If the IBC process appears over-burdened, the solution is to create more capacity rather than coming up with yet another resolution mechanism.