Old wine, new bottle

Project ‘Sashakt’ — the Sunil Mehta-led committee’s five-point plan on bad loan resolution — offers little by way of any actionable plan to tackle the issues at hand. The committee’s five-pronged strategy is nothing but a shoddy attempt to politicise cleaning up of banks’ balance sheet and state the obvious, after the initial intent of setting up an asset reconstruction company to take over bad loans ran aground. For instance, the bank-led resolution approach suggested for loans of ₹50-500 crore, is nothing new. The lead bank — in a consortium lending — preparing a resolution plan, to be approved by 66 per cent of the lenders (by value) is only a mere tweak at best, to the earlier JLF (the joint lenders’ forum) structure that failed miserably. The real challenge that banks faced with the JLF was to get everybody on board and build consensus on debt restructuring. Rather than address this issue, the report ends abruptly, setting a 180-day deadline for resolution, taking lead from the RBI’s February circular on stressed assets. The structure also fails to serve the interests of smaller banks — as in the case of JLF — which, unlike the larger ones, may not be willing to throw good money after bad, if restructuring involves additional finance.

On larger loans — above ₹500 crore — the committee, which rightly points out the lacunae in the existing functioning of asset reconstruction companies (ARCs), fails to elaborate on how such issues will be tackled under the proposed Asset Management Company (AMC) or Alternative Investment Fund (AIF) structure. Unwillingness on the part of the banks to downsize loans, and identify the serviceable portion of debt, has been a key challenge under earlier restructuring schemes such as SDR, or while offloading loans to ARCs. Unless banks are willing and able to take large haircuts, price discovery through open auction, as proposed under the AMC/AIF approach, mean little. Inability to attract capital, owing to regulatory headwinds and poor recovery, has been a key reason for the lacklustre performance by the existing 26 ARCs. While the report talks of raising funds from institutional investors for the AIF, it is unclear, how capital — which has eluded existing ARC players — will start to flow. Unattractive returns and poor recovery rates have dissuaded investors from taking the plunge.

‘Strong independent governance’, ‘paradigm shift in risk process’ and ‘no government intervention’ — words strewn across the Mehta panel’s report — come across as mere rhetoric. . Empowering boards, setting a roadmap for consolidation and the Centre diluting its stake in PSBs are long awaited structural reforms that have sadly been put on the backburner. Instead, quick-fixes such as arm-twisting LIC to rescue IDBI Bank have taken centre-stage. Unless the Centre shows some ‘tough love’ and pushes through reforms, any new proposal to tackle banks’ NPA problem will only remain a cosmetic measure.

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