The proposed asset management company to resolve the bad loans through a market-led approach will be privately owned. That’s the word coming in from State Bank of India Chairman Rajnish Kumar.
The government yesterday accepted a new resolution scheme suggested by a committee of bankers to tackle the mounting bad loan problem. The suggestion to create an AMC is a part of the scheme titled ‘Sashakt’. Interim Finance Minister Piyush Goyal last month announced the setting up of the high-powered committee to deal with non-performing assets.
“As recommended by the committee, we are looking at an AMC with a wide participation from private as well as public sector,” Kumar told BloombergQuint. “Private will definitely be holding more than 50 percent in the AMC.”
Watch the interview here
Below is an edited transcript of the interview
Can you talk us through why you think this third arm of ‘Sashakt’, the one that deals with accounts of Rs 500 crore or more, is likely to succeed when all other schemes— that have relied on banks making a decision to take a haircut and that has relied on external investors coming in to fund these assets—have failed so far?
The thinking is that first there was an analysis of the current situation where there are two-three problems being faced by the banking system in resolution of these stressed assets. The biggest problem is fragmented decision-making and there are too many banks in consortium and multiple banking. There is no forum as of now which has any legal sanctity. So through an inter-creditor agreement, the attempt is that all the banks come together, be bound by some ground rules and take consolidated steps and dissolve the asset.
The second question comes in is that the asset reconstruction company’s capability to buyout any big asset, one single ARC, because their capital might not be sufficient. The third issue is about the redemption record of the ARCs which has not been great.
So the committee has tried to adjust all these three questions and hence the suggested mechanism of AMC, AIF, ARC structure where the ARC will have the backing of an alternative investment fund which are willing to fund an asset. Once it gets coordinated and there is an AMC, which is managed by competent professionals—these changes of resolution will be much right.
Yesterday the finance minister repeated this point that you don’t really need a law to create such a structure. Why is it that bankers such as yourself had to say that we are willing to put the first stake and probably the private structure will come up to create these structures that will take over the assets?
There is a felt need for an AMC that is professionally run and that can manage the large type assets for resolution. Someone has to take the initiative. And as the finance minister mentions and as it has been recommended by the committee, we are looking at an AMC with a wide participation from private as well as public sector. Private will definitely be holding more than 50 percent in the AMC. And let me clarify that AMC does not require a huge amount of capital. It is a fund registered with the Securities and Exchange Board of India. There the funding requirements will be considerable and there will be participation from the banks, domestic and foreign institutional investors who have interest in stressed assets. So it is hoped that they will participate.
Why is this any different? I saw the presentation which specifically said “this is not a bad bank”. You want to park these assets in another entity. You are calling it an AMC instead of an ARC. Banks are looking to park their assets. There is some amount of conflict of interest in the fact that the banks will hold equity in the AMC, also because this will also become a market maker.
There is no question of any conflict of interest. I agree with you that everything is in the existing regulatory framework. But it is not a bad bank because the assets, when they are being sold, they are being sold at a market-determined price. That is the key difference. The question always comes in is that when the asset is being sold, there will be a loss and that will be borne by the bank up front. It is not that the asset is being transferred at the book value and a bad bank will provide capital and take over this asset at book value. To that extent, even today the banks sell assets to ARC and when they sell these assets under the proposed arrangement also, it will be through open bidding, through inviting expression of interest.
What is the key difference, you need to understand. Under the suggested mechanism, under an inter-creditor agreement, the banks will take a uniform approach. So if an asset is to be sold, the idea is that it is sold to a single ARC. So that even at an ARC level the asset gets consolidated. Otherwise today even at the ARC level an asset can be sold to a different ARC with different banks. That is the first key difference.
Second, the ARC should be paying the banks within 60 days and the security receipts have to be redeemed. If that has to happen, an ARC would need a backing from the fund. And when they invest they have an AMC. So it is a combination of three. The key difference is that three things—AMC, AIF and ARC—are moving in coordination and the sellers, the banks, are also moving in coordination and when asset gets consolidated at one entity level, one fund, one AMC, then obviously the decision-making will be much faster. As far as banks are concerned, as I said, at the time of sale itself, whatever is the provisioning cap, the banks have to bear that loss or book that loss in their books.
If I could question the premise of success of this plan—inter-credit agreement creates a formalisation that did not exist before. Under the various resolution schemes of the RBI, there was already a formality as to how banks came together and attempted to restructure assets which involved banks taking a decision on what haircut to take, which banks failed to do. As a result, we have so many assets that are currently under the insolvency proceeding at the National Company Law Tribunal. Why should we presume that when banks have for years now failed to be able to take a decision in consensus on what haircut to take, whether under the CDR scheme or any other scheme, suddenly now because of this structure they will all find consensus and make that decision. Second, what private sector money are you expecting will come to the table, given that this money has already been around but has not yet come to the table. So why is it that we are expecting that there will be a sudden renewed interest in being able to help banks resolve this?
Before the Feb. 12 circular of the RBI, the joint lender’s forum mechanism was prescribed by the RBI. It had some form of a regulatory backing. After that circular, the JLF mechanism has been discontinued. When there are more than one bank, and in some cases there are as many as 40 banks, who and in what manner do the banks come and take action with consensus? In the absence of any regulatory mechanism, ultimately it is upon the bank to work out a consensus arrangement and work out the rules through which they are willing to work.
The JLF mechanism has not worked so far, otherwise we would not have seen so many assets in insolvency.
No. It is not correct that the JLF mechanism has not worked. There were issues around delays and why we expect that the delays will not be there now is because the resolution framework of the RBI itself puts a time limit of 180 days. If in 180 days, the lenders do not come to a consensus on any resolution plan, then in any case the asset lands into NCLT. Those 180 days come from the regulatory guidelines. Second, if a inter-creditor agreement is approved by all boards of the bank and the ground rules are laid out, and through the inter-creditor agreement the consensus will be that 67 percent by value, if the lenders agree on a particular course of action, that will become binding on all banks.
I understand the need for an inter-creditor agreement now that the JLF mechanism is out. So under this effort of being able to either resolve or go to IBC, you have created this agreement. But the second point is, where is the buying interest going to come from? You suggested in your response that this AMC, ARC, bad bank or whatever you choose to call it, will have up to 50 percent private sector investment and up to 50 percent public sector investment. How is this AMC going to get funded and to what extent do you have any idea what are the amounts involved?
There is a huge interest in the stressed asset resolution as far as the institution or the banks are concerned.
In your estimate what are the amounts involved that the AMC would need to be able to get off to a successful start?
If you look at the presentation, this Rs 500 crore and above, the estimate is about Rs 3 lakh crore. The amount needed would be that what is the average percentage estimated recovery. So the amount can vary. Suppose it is 40 percent, you need Rs 1.2 lakh crore in funds for recovery.
How much of that do you estimate will come from foreign investors, AIFs, all kinds of investors except for existing banks and financial institutions plagued with this problem?
First, in any alternative investment fund existing at the bank cannot participate for more than 10 percent. And it carries a risk weight of 150 percent. When any bank decides to participate in the fund, it will depend upon their risk appetite, investment policy, they will have to take into account the capital requirement on account of the RBI guidelines where the risk weight for the investment in any alternative investment fund is 150 percent.
Back of the envelope calculation, Rs 1.2 lakh crore, how much do you expect will be generated from external investors—those that are not banks or financial institutions already plagued by this NPA situation?
Leave aside the banks, but the expectation is at just 60-70 percent should come from domestic institutions and banks, and 30-35 percent should come from foreign investors. As I said, there is a huge interest in this stressed asset market in India and there is every possibility that these type of funds can be raised. It is not that you need it in one day. You require this funding over a period of 6-24 months at least because you have to do the due diligence, then pick up the asset and then fund it. So let us see how things unfold but money is not an issue till then.
What is your sense of how quickly this will be up and running? Two years back this would have made a lot more sense than it does today. Mr. Kannan said this does not have anything to do with the RBI so I do not understand how. Has this plan been discussed and cleared by the RBI?
The committee chairman did meet the RBI officials and the copy has been given to the RBI. But, the committee when drawing the plans, has not showed that whatever plan has been prepared it does not seek any dispensation or any forbearance from the regulators, primarily which mean the RBI. So whatever has been suggested or recommended, it is within the existing regulatory framework, and that is very important to know. That is what Mr. Kannan or the committee or whoever has mentioned that we or the banks do not need any special dispensation from anyone-either the regulators or the government. So, that is true.
How long would it take for this fund to set up? The National Infrastructure Investment Fund took two years, if not more, to actually get into action.
As I said, as far inter-creditor agreement among the lender is concerned, that we will move very fast. On AMC, there is interest and the hope is that in the next three-six months, we should be able to see the first deal coming through. Particularly, there are many power assets where there is effort to at least revive those assets and keep them up and running where the power purchase agreements are available, fuel-supply agreements are available, and many more PPAs are expected from the state government. The power sector is one which I believe will take off very quickly.
So this marries your Samadhan scheme with the effort to resolve the larger NPA problem.
The Rs 1.2 lakh crore hypothetical amount we talked about would get funded 60-70 percent funds from domestic financial institutions. Whom are you referring to? Bank exposure would be very limited from the PSU bank front. The private bank exposure, too, would be limited given where they are today and how many of these private sector banks don’t even want to be involved with some of these assets. Are you suggesting it will be an insurance or pension companies?
Many places and even banks will fund. State bank of India is willing to participate. You can presume that Rs 10,000 crore can come from SBI alone.
You will be spending your money to buy out your own loans.
Are you reaching out to LIC?
We will reach out to everyone. It is not such a huge amount of money and you do not need it in one day.