Project Sashakt : An approach to Bad loans
- March 19, 2019, 4:21 pm
A five-pronged strategy to resolve bad loans, with the other ones such as an asset management company (AMC) or an alternative investment fund (AIF) has been introduced by the government.
What is Project Sashakt?
Project Sashakt was proposed by a panel led by PNB chairman Sunil Mehta. Bad loans of up to ? 50 crores will be managed at the bank level, with a deadline of 90 days. For bad loans of ? 50-500 crore, banks will enter an inter-creditor agreement, authorizing the lead bank to implement a resolution plan in 180 days or refer the asset to NCLT. For loans above ? 500 crores, the panel recommended an independent AMC, supported by institutional funding through the AIF. The idea is to help consolidate stressed assets.
What is an Asset Management Company - AMC?
An asset management company (AMC) is a company that invests its clients' pooled funds into securities. Asset management companies provide investors with more diversification and investing options such as mutual funds, hedge funds and pension plans, and these companies earn income by charging service fees or commissions to their clients.
Alternate Investment Funds?
Anything alternate to the traditional form of investments gets categorized as alternative investments. Generally, the term AIF refers to private equity and hedge funds. In India, alternative investment funds (AIFs) refers to any privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate.
Hence, in India, AIFs are private funds which are otherwise not coming under the jurisdiction of any regulatory agency in India.AIFs includes Venture Capital Fund, hedge funds, private equity funds, commodity funds, Debt Funds, infrastructure funds, etc.,
How will the national AMC work?
Banks will have to set up an AMC under which there will be multiple, sector-specific AIFs. These funds will invest in the stressed assets bought by existing ARCs, such as ARCIL. The ARCs will use the funds to redeem security receipts issued to banks against the bad loans. Other AMC-AIFs and ARCs will be allowed to bid for these assets, and match the pricing offered by ARCIL or the national AMC.
Who will own the stressed asset?
The ARC after buying the asset from lenders will transfer ownership to the AIF. The new owner, the AMC-AIF, will hold a stake of at least 76%.
What is the money involved?
The total quantum of bad loans worth ? 500 crore or more is estimated at ? 3 trillion. The AMC will require funds of ? 1.2 trillion. Of this, 60-70% is expected to come from domestic institutions and banks, and the remaining 30-35% from foreign investors.
Inter-Creditor Agreement :
The Inter-Creditor Agreement (ICA) framework, which envisages effective communication among lenders and lays down some ground rules for multiple-banking arrangements and consortium lending, will now be taken to boards of all the banks.ICA is a part of the recently announced Project Sashakt, recommended by the Sunil Mehta-led committee. ICA will be voluntary for banks.This process already exists under the Insolvency and Bankruptcy Code. By giving another 180 days, the panel has provided a buffer to the defaulting company when their default and the non-performing asset has already been recognised.
So while Project Sashakt certainly provides a breather to both banks and promoters from the tough bankruptcy code, it is questionable whether it will end up making banks stronger.