A committee of bankers led by Punjab National Bank chairman Sunil Mehta has proposed that a national asset management company be set up to take over bad loans from banks, two people in the know confirmed.
The committee was set up in early June to look at the efficacy of a ‘bad bank’ like structure and submitted its report to the government today. To be sure, any proposal by the committee would need to be approved by the government and, possibly, the regulator before it is implemented.
Bankers have suggested setting up an AMC with equity contribution from banks, foreign funds and infrastructure funds such as the National Infrastructure Investment Fund, said the people quoted above. The AMC could be set up under an existing asset reconstruction company like Arcil Ltd. which is already promoted by banks, the two people quoted above said.
According to the bankers, the process would work in the following way:
- National AMC determines price of individual accounts after due diligence.
- AMC pays banks 15 percent upfront cash for the asset.
- AMC discloses price of asset and invites bids from private ARCs/stressed asset funds through ‘swiss challenge’ method.
- If private bidder emerges at higher price, that bidder repays the 15 percent payment made by National AMC.
- If no private bidder emerges, National AMC pays the remaining 85 percent to banks in cash.
- For the assets held by the National AMC, turnaround specialists would be appointed and the asset sold down to strategic buyers over a period of time.
The Mehta committee comprised of representatives of all major banks, including State Bank of India.
According to an Indian Banks’ Association official, who spoke on conditions of anonymity, bankers felt that there is a need to take the function of NPA management out of the banks so they may focus on lending and growing their balance sheets. Transferring NPA management to a specialised entity would help aggregate the accounts and streamline decision making, said this official.
The plan to set up a national ARC over and above existing private ARCs and stressed asset funds 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.