None of the recommendations give an immediate handle to attempt early resolution of NPAs in banks
From a reading of the Sunil Mehta Committee report on restructuring stressed assets and creating more value for public sector banks, one can say that a lot of time and energy has been wasted without any useful purpose. The only positive outcome is that the idea of a bad bank has been junked. One hopes it will not crop up again when the authorities run out of ideas for resolving NPAs (non-performing assets).
There is nothing new in the report. The committee suggests what banks should do, which most of the banks any way are doing. The bank-led resolution approach has failed and that’s why alternative plans to resolve NPAs quickly are being sought. “Large banks will help smaller lead banks to run the process if required,” is a laughable suggestion.
Why another AMC?
Other recommendations like banks setting up focussed verticals for management of stressed assets, templated resolution approaches, SME Steering Committee, among others, are not new ideas. These are in operation in most of the banks in one form or the other.
Solutions to help banks out of the huge NPA mess must be found rather than suggest complicated work processes that burden them further.
Setting up of an asset management company (AMC) or alternate investment fund (AIF) may look like a good recommendation. But should new platforms be created for NPA resolution? When 26 ARCs and a couple of resolution advisory service companies are in operation, do we need another set of AMCs?
And, how will AIFs work with a series of AMCs? What is the time horizon? Quick action must be taken rather than go around in circles. There is no recommendation which will give an immediate handle to at least attempt an early resolution.
Therefore, what is outlined in the RBI circular of February 2018 and the IBC (Insolvency and Bankruptcy Code) is the best suited resolution process, where all lenders, including ARCs, can participate. But for the legal entanglement being created by promoters and interested parties, the IBC has so far been a proactive institutional set-up.
Legal recourse has to be minimised so as to arrest the tendency of wealthy promoters and interested parties running to the courts for anything and everything, paying their lawyers rather than the lenders. The Mehta Committee has totally failed in identifying the issues in NPA resolution. The government appears to be serious about resolving the NPA menace and banks should, therefore, be given a helping hand.
It is easy to say that bank executives should not be afraid of the CBI/CVC. If the rules are flouted, they will no doubt be answerable. But that is not the case today. To make the work of bankers easier, there should be a collectively approved mechanism with the blessing of the government and the regulator.
One will agree that keeping NPAs in the banks’ books will not do them any good. So they have to be taken out. How can this be done? What are the problems in doing so in the present ARC set-up, which are institutions created for this purpose.
Pricing a grey area
There are some key issues here: One, the price at which the banks should transfer the assets to ARCs. Valuation is the basis on which a bank decides the price. Valuation and detailed due diligence are the backbone of price quoted by ARCs. But then there is no match between these two valuations and hence the difference in the price.
There has been so much discussion on this issue in the past, but it still remains unresolved. Can it not be sorted out? There should be a mechanism to ensure fair valuation, wherein the factors that are being considered by banks as well as ARCs should be taken together. Here, perhaps a templated valuation structure can be created under the aegis of the IBA (Indian Banks’ Association).
ARCs are smaller institutions compared to banks and people make investments in them with expectations of returns. If that money is to be used for upfront payment to banks for acquisition whose resolution is not certain, ARCs will be answerable to the investors. Therefore, the views of ARCs will have to be considered. If the IBA cannot do it, the RBI has to step in and streamline the valuation process in a manner acceptable to both banks and ARCs. This will not be time-consuming. A couple of joint sittings can bring out the viewpoints.
Debt aggregation is another important issue. This can be easily sorted out. As was done in a few cases in recent times, the lead bank can take a call. If the lead bank decides to sell the asset to ARCs, other banks should follow suit at the same price so that the ARCs can start the resolution process right from the date of acquisition.
ARCs are low-capitalised institutions. If large scale NPA resolution is to be done they too have to mobilise resources. Only a few investors have come in so far, but there is a lot of interest among others. If the aforementioned bottlenecks are cleared, investors will step in and adequate funds will be made available.
The writer is a former MD and CEO, Arcil, and former CEO of Ambit Flowers ARC. The views are personal.