Synopsis–The proposed AMC will work on a fee-based model. It will collate bad debt across banks and reach out to institutional investors, including distressed funds. Once the AMC secures funding for the collated asset, it will engage with ARCs to turn around the asset.
The proposed firm will not be a full-fledged bad bank, an idea that the Reserve Bank of India (RBI) is not in favour of.
Instead, it will act as a conduit between distressed funds, asset reconstruction firms and lenders.
“Unlike a bad bank, it won’t take up the impaired loan portfolio on its books and then find ways to settle it,” said a government official aware of the matter, adding that these were preliminary discussions.
The proposed AMC will work on a fee-based model. It will collate bad debt across banks and reach out to institutional investors, including distressed funds. Once the AMC secures funding for the collated asset, it will engage with ARCs to turn around the asset.
The aim is to find a mechanism before banks resort to the Insolvency and Bankruptcy Code.
According to the RBI’s Financial Stability Report of July 2020, the gross Non-Performing Assets ratio of state-owned banks, which was at 11.3% in March 2020, may increase to 15.2% by March 2021 under the baseline scenario.
In such a situation, the government feels banks need more help in dealing with bad loans.
“There is a view within the government that more action is required on the NPAs in banks than what is available through the Bankruptcy Code, but a government-driven bad bank is not palatable,” said another official.
The AMC route may be more acceptable, and the government would also not need to put substantial equity to set up such a structure.
“It can be a focussed special purpose vehicle (SPV) which will attract institutional funding in stressed assets,” said the first official quoted above. The AMC will then engage asset reconstruction firms (ARCs) towards operational turnaround of the asset.
Experts believe that an AMC structure can be a viable option if the government has some stake in disposing of the bad loans.
“If this government body is isolated from vigilance issues in price discovery mechanism then this model may work,” said MP Shorawala, a former independent director with state-run Central Bank of India. “Banks, anyway, are taking huge haircuts through IBC. So, if this AMC helps them to get bad loans off their books without vigilance concerns and at a better price then why not?”
Earlier this month, Economic Affairs secretary Tarun Bajaj had said that the government was looking at various options to improve the health of the banking sector, which includes setting up of a bad bank.
“We are looking at various options, including the option you mentioned (of bad bank), and it is still in the works…,” he had said in response to a query.
In their customary pre-budget meeting with finance minister Nirmala Sitharaman, industry associations had also sought for the setting up of a bad bank to tackle rising bad loans.
“High NPAs are affecting credit cycles, and Covid-19 (outbreak) is expected to exacerbate the NPA problem. Government should create multiple bad banks by allowing Alternate Investment Funds (AIFs) to buy bad loans,” Confederation of Indian Industry (CII) president Uday Kotak had proposed during the meeting.