Mehta panel suggests bank-led 5-point resolution plan for NPAs

The high-level committee on restructuring stressed assets with public sector banks (PSBs) has suggested a comprehensive, market-based solution with a focus on asset turnaround while protecting and even creating jobs.

The banks-led, five-pronged, comprehensive plan — Sashakt — for the resolution of stressed assets with PSBs, includes creation of one or more widely held asset management companies for loans above Rs500 crore.
The committee, headed by Sunil Mehta, non-executive chairman of Punjab National Bank, submitted the report to interim finance minister Piyush Goyal on Monday.
Goyal said the recommendations of the committee are fully compliant with RBI regulations, and that there is no proposal to create a “bad bank”. The proposals also do not involve regulatory issues or any immediate government involvement, the finance minister said.
The idea behind `Project Sashakt’ is to ensure the operational turnaround of the banks and stressed companies so that the asset value is retained, Goyal said, adding that the resolution process suggested by the committee will also help bring in credible long-term external capital while ensuring robust governance and credit architecture to prevent a similar build-up of non-performing loans in the future.
The five-pronged resolution route outlines an SME resolution approach, a bank-led resolution approach, an AMC/AIF led resolution approach, an NCLT / IBC approach and the creation of an asset-trading platform for the different asset classes.
The committee has classified banking sector assets for potential turnaround — smaller assets with exposure up to Rs50 crore, mid-size assets of between Rs50 crore and Rs500 crore, and large assets with exposure of Rs500 crore and more.
The resolution route is also applicable to larger assets already before the National Company Law Tribunal (NCLT) and any other asset whose resolution is still pending.
The process will cover both performing and non-performing assets.
For the resolution of SMEs, the committee suggested the setting up of a steering committee by banks for formulating and validating the schemes, with a provision for additional funds. The committee has suggested bringing the resolution process under a single bank for speedier action so that theresolution can be completed within 90 days.
For loans between Rs50 crore and Rs500 crore, the committee has suggested a bank-led resolution approach, with the resolution being achieved in 180 days. The resolution plan has to be approved by lenders holding at least 66 per cent of the debt, it added.
The independent steering committee appointed by the Indian Banks Association (IBA) has to validate the process within 30 days. The key to resolution, however, will be arriving at a consensus, as the exposure is held by multiple banks/lenders.
For loans above Rs500 crore, an independent asset management company (AMC) will be set up.
Alternatively, the committee also suggested setting up of an alternative investment fund (AIF) that would raise funds from institutional investors. Banks would be given an option to invest in this fund if they wish. AIFs can also bid for assets in NCLT, it said.
The lead bank can discover price discovery through the open auction route. Security receipts have to be redeemed within 60 days, the committee said.
There are over 200 large non-performing loans amounting to a total Rs3,10,000 crore with exposure spread across multiple banks.
Gross non-performing assets (NPAs) with the banking system hit as high as Rs8,99,000 crore (or 10.11 per cent of total advances) as of December 2017. 
Around 85 per cent of these bad loans were with the PSBs. As many as 11 of the 21 PSBs are under the central bank’s prompt corrective action (PCA) framework.  Net NPAs of the five of the 11 PCA-banks were uncomfortably high at the end of March 2018. 
These include IDBI Bank (net NPA ratio of 16.69 per cent), United Bank of India (16.49 per cent), Indian Overseas Bank (15.33 per cent), Dena Bank (11.95 per cent) and Bank of Maharashtra (11.76 per cent). The 11 stressed banks make up for 30 per cent of deposits and 29 per cent of advances of all the 21 PSBs.