The Sunil Mehta committee resolution plan - quick take

Here's a quick reaction to yesterday's late evening FinMin announcements on the new stressed assets resolution plan.

1) For loans below INR 500cr, it largely seems a call to do more within the existing framework.

What's new is the proposal that AIFs take over stressed loans beyond INR 500cr.

2) What's good about the AMC/ AIF proposal is that (i) it will take out large assets out of bank books - just as a bad bank would (ii) it will concentrate stressed asset ownership into one entity, and do away with the need to coordinate amongst multiple bankers - just as a bad bank would and (iii) if it works well, it could be the start of proper distressed debt trading in Indian markets

3) The issues to be addressed in the AMC/ AIF proposal are:

(a) banks setting up an AMC that launches AIFs to buy banking assets - there is obvious potential for conflict of interest.

(b) A related issue would be the transfer price of assets from banks to the AIF. If the AIF and banks agree on a price (where ARCs and banks have struggled in the past), there will be questions on whether the price is truly market driven or not.

(c) To address perceptions of conflict of interest and market pricing of assets, key would be to ensure the AIF draws in savvy investors (and not just banks/ govt. owned investors). 

(d) If we do get a wide and independent investor base, and assets are transferred at truly independent prices, are banks provisioned enough to absorb the haircuts? PSU banks have provisions of 47% of gross NPA and 42% of stressed assets as of 31st March 2018. While there has been good news on a couple of steel asset resolutions, the fear is that more provisions & haircuts may be required on an aggregate basis. That would necessitate more capital infusion into banks.

4) What's missing from Delhi - and possibly was outside the remit of the committee - is a way forward to reform Indian banking, so that this cycle of lend and bust stops. Will someone please dust off the P J Nayak committee report recommendations?

Anyway, interesting times as ever!

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