Government Unveils Five-Point Plan ‘Sashakt’ To Tackle Bad Loans

Banks propose Sashakt scheme to deal with bad loans, government accepts.

Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)
Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

The government today accepted a new resolution scheme submitted by a committee of bankers to tackle India’s mounting bad loans, interim Finance Minister Piyush Goyal said.

The scheme, titled Sashakt, aims at resolving the problem of non-performing assets through a market-led approach. Under the scheme, bankers are not seeking any dispensation or forbearance from the Reserve Bank of India, Goyal told reporters at a news conference today.

Last month, Goyal had announced the setting up of a high-powered bankers’ committee to better deal with bad loans through an asset management company or asset reconstruction company structure. Sunil Mehta, chairman of Punjab National Bank had been asked to lead the committee.

Details of the plan, as provided by the interim finance minister, are as below:

  • For loans under Rs 50 crore, a resolution plan will be arrived at within 90 days of detection of stress by individual banks.
  • For assets between Rs 50-500 crore, the lead lender should take charge and devise a resolution plan within 180 days.
  • For assets worth over Rs 500 crore, an AMC structure will be created.
  • Multiple AMCs are likely to be created.
  • AMC to be formed with equity infusion from banks, foreign funds, infrastructure investment funds.
  • Alternative investment funds will be created by institutional investors.
  • AIFs will fund AMCs to buy stressed assets from the banking sector.
  • Banks may also invest in AIFs to tap into upside on the asset later.
  • AMCs will appoint industry experts and turn around specialists to help resolve the stressed asset.
  • AMCs will repay security receipts in full within 60 days
  • ARCs will also be allowed to bid for assets through a transparent auction process.
  • ARCs could also tie up with AMCs to operate and turn around the asset.
  • Banks may also push for creation of a platform for trading assets.
Banks Propose A Joint AMC To Take Over Bad Loans

The scheme comes against the backdrop of a pile of bad loans which continues to grow. As on March 31, 2018, bad loans across listed banks stood at over Rs 10 lakh crore. This could rise further over the coming quarters, cautioned the Reserve Bank of India in its Financial Stability Report released last week. The gross NPA ratio of scheduled commercial banks could rise to 12.2 percent by March 2019 from 11.6 percent in March 2018, said the RBI.