If banks or ARCs could resolve their bad loans, they would have done it by now, and not waited for RBI to force them to act
The Sunil Mehta Committee’s suggestion that bad loans should be sold to an AMC looks wonderful on paper but is terribly optimistic. In India, the basic problem relating to bad loans is that there is never enough collateral. So, it is very hard to recover money from the promoters. Also, promoters tend to strip sick companies of their assets and the plant and machinery are often in poor shape, so, these fetch little more than scrap value. Turning around companies is hard because they are so poorly capitalised. This is precisely why ARCs (asset reconstruction companies) have been reluctant to buy out the assets unless there is a huge discount. However, banks don’t want to sell if the haircut is too steep. Once RBI amended the ARC regulation in August 2014 to say the ARCs must pay 15% upfront in cash—earlier it was 5%—and the rest in security receipts, the ARCs got cold feet.
The committee set up to find ways to resolve stressed assets has suggested an independent AMC be set up to buy the bad loans—above Rs 500 crore—from the banks. While some of the banks will chip in to build a corpus, it is not clear who else will and how big the pool of investible funds will be. There is talk of some financial institutions coming in—NIIF, for instance—but, as of now, there is no certainty they will. Nonetheless, it is hard to see why the AMC or any other bidder would want to buy these bad loans unless they are getting an exceptionally good bargain. In which case, why shouldn’t banks simply initiate insolvency proceedings under the Insolvency and Bankruptcy (IBC) code? As we have seen, buyers have come forward to bid for companies.
The argument in favour of an AMC-ARC model is that the winning ARC will pay up within 60 days; the IBC process takes longer. One would think the IBC route—where the committee of creditors has a say in the sale—would be a better option because banks could protect their interests without having to make an upfront contribution to any AMC. And, if vulture funds or ARCs or private equity players are interested in a particular business, they could always bid for it. The IBC route is as market-based and transparent as the new approach promises to be. Moreover, it is free from government intervention. And, while it sounds good to talk about turnaround specialists, in reality the promoters can do as good a job with the necessary resources. In fact, the committee claims the new process is aligned with the IBC process. So, why have a second process?
The bankers believe that once the assets are turned around, they can participate in the upside; that optimism seems misplaced because, if there is so much upside, they should hold on to the assets. Moreover, claiming the new resolution process will ensure that “a robust governance and credit architecture is put in place to prevent similar build-up of non-performing loans in the future” strains credulity. At the end of the day, bankers must upgrade their appraisal skills and the systems and processes must be foolproof. They must have it in themselves to do an honest day’s work and to do it efficiently. And, it takes years to usher in that kind of a mindset.