Lenders Bank On ‘Sashakt’ Plan To Dull The Bad Loan Pain. But Will It Work?

Three years into the bad loan cycle, recognition of stressed assets has progressed but resolution has crawled. The result – banks are sitting on over Rs 10 lakh crore in bad loans, with recoveries still some distance away.

Anthony questions whether a large AIF can be raised in such a short period of time and whether return expectations of investors in such funds would be met.

“AIF investors look for at least returns of 20 percent plus in Indian rupee terms. Foreign investors look for dollar returns of 13-14 percent. So if one has to get this return, then the pricing is very crucial,” Anthony said.

The Pricing & Debt Aggregation Challenge

One of the reasons that deals between banks and stressed asset investors have not closed is because banks are wary of agreeing to large haircuts. Apart from the lack of adequate capital, bankers have also been reluctant to take decisions for fear of being questioned by investigative agencies.

With an AMC structure, the responsibility of determining the haircut on a stressed account gets transferred to the board of the AMC and the investment committee of the AIF.

Kumar said that this will help bring back an institutional mechanism to make collective decisions. Until recently, bankers used the Joint Lenders’ Forum to make decisions related to consortium loans but this forum was dismantled by the RBI earlier this year. “In the absence of any regulatory mechanism, ultimately it is upon the banks to work out a consensus arrangement and work out the rules through which they are willing to work,” said Kumar.

According to the presentation made by banks, an inter-creditor agreement would be signed, authorising the lead bank to implement a resolution plan. This, they hope, will address the challenge of getting all bankers on board a resolution plan.

Price discovery and debt aggregation have been the key challenges for the existing asset reconstruction companies, said Anthony while adding that he is not convinced these challenges will be immediately addressed. “Unless there is a direction from the government or the regulator, that the lead bank is empowered to do this....I think that is crucial.”

Kumar is hopeful that bankers will come to an agreement.

The Size Of The Problem

The attempt to find another solution to the stressed asset problem comes against the backdrop of an unabated rise in bad loans.

Gross non-performing assets of listed banks rose to Rs 10.3 lakh crore at the end of the March 2018 quarter. This number is set to rise further. The RBI, in its latest Financial Stability Report, cautioned that gross bad loans may rise to 12.2 percent of total loans by March 2019 from 11.6 percent as of March 2018.

While bad loans have risen, banks have been unable to sell these loans to private asset reconstruction companies and stressed asset funds as initially envisaged. Assets being managed by ARCs are roughly Rs 2 lakh crore or only a fifth of the bad loans on bank books, Anthony estimates.

The size of the problem is large and that is why new schemes are being considered, he said while adding that the success of the plan will depend on banks being willing to sell assets at the right price.