To decisively deal with the banking system’s stressed assets, which have doubled from 2013, the Reserve Bank of India is examining a plan involving two models — a Private Asset Management Company (PAMC) and a National Asset Management Company (NAMC).

This plan also recognises the concomitant need for bank resolution via private capital raising, mergers, and asset sales.

The PAMC plan would be suitable for sectors, such as metals, engineering projects, construction, telecom, and textiles, where the stress is such that assets are likely to have economic value in the short run, with moderate levels of debt forgiveness, said Viral Acharya, Deputy Governor, RBI, at the Indian Banks’ Association’s Banking Technology Awards event.

In terms of timeline, the banking sector will be asked to resolve and restructure, say, its 50 largest stressed exposures in these sectors, by December 31, 2017, he said, adding the rest can follow a similar plan in six months thereafter.

For each asset, turnaround specialists and private investors — other than affiliates of banks exposed to the asset — will be called upon to propose several resolution plans.

Each resolution plan will lay out sustainable debt and debt-for-equity conversions for banks to facilitate the issuance of new equity and possibly some new debt to fund the investment needs.

Each resolution plan would then get vetted and rated by at least two credit rating agencies to assess the financial health, economic health, and management quality. The rating would be for the asset and not just for bank debt in case additional debt is issued under the plan.

The Deputy Governor elaborated that “feasible plans would be those that improve the rating of the asset... The intention is that the asset should not have a high likelihood of ending up in stress soon after restructuring. “Therefore, bank debt forgiveness may have to be high enough and its converted equity stake low enough so that new investors can come in with a controlling stake and have incentives to turn the asset around.” At expiration of the timeline, each exposure that is not resolved will be subject to a steep sector-based haircut for the bank consortium, possibly close to 100 per cent. The promoter will automatically have to leave. These assets would be put into the new Insolvency and Bankruptcy Code regime. Alternately, they could be put up for sale to asset reconstruction companies and private equity investors who can turn around the assets, levering them up with fresh finance, if necessary.

NAMC The NAMC plan would be necessary for sectors where the problem is not just one of excess capacity but possibly also of economically unviable assets in the short- to medium-term.

“Take, for example, the power sector, where projects have been created to deliver aggregate capacity that is beyond the estimated peak utilisation anytime soon. Many of these are stalled as they have no fuel inputs and little or no income realisation due to lack of credible purchase agreements.

“Their scrap value is likely to be small and the only efficient use is as an ongoing concern. If input and output requirements are sorted out, and as power consumption needs rise, these projects could eventually provide value,” said Acharya.

For a country with per capita consumption of electricity that is only one-third of the world average, it is reasonable to expect that a well-run power asset won’t end up being a white elephant, he added.

Bank resolution When it comes to recapitalisation of public sector banks, Acharya felt that the government should ask in return significant corrective actions, and wherever possible, injections of private capital for loss-sharing with the taxpayers.

“We must not allocate capital so poorly, recreate “Heads I Win, Tails the Taxpayer Loses” incentives, and sow the seeds of another lending excess,” he cautioned.

Acharya proposed five options for recapitalisation of public sector banks: through private capital raising, asset sales, mergers, prompt corrective action and disinvestments.

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