Project Sashakt: Sunil Mehta Committee’s 5-pronged strategy to tackle NPAs approved

Jul 3, 2018 16:27 IST
Union Finance Ministry approves Mehta Committee’s 5-pronged strategy to tackle NPAs

Union Finance Minister Piyush Goyal on July 2, 2018 approved the Sunil Mehta Committee’s suggestions of a 5-pronged strategy to tackle the Non-Performing Assets (NPA).

The committee led by Punjab National Bank Chairman Sunil Mehta has submitted its draft report titled 'Sashakt' to the Finance Ministry with a strategy to tackle stress in the banking sector. However, there is no proposal or recommendation to create a bad bank.

The recommendations now await the approval of the Reserve Bank of India (RBI).

Recommendations of the Committee

The 'Sashakt' Report highlights nine guiding principles aimed at the operational turnaround of the banking sector in a manner that will create jobs and enhance the value of public sector banks.

Resolution of bad assets below Rs 50 crore within 90 days: Banks will be required to create a ‘Focused Vertical’ for bad assets below Rs 50 crore and set up a Steering Committee for resolution of such bad assets within 90 days.

• Resolution of consortium loans between Rs 50-500 crore within 180 days: It suggested the Bank Led Resolution Approach (BLRA) for loans between Rs 50 and Rs 500 crore. It suggested constitution of an Independent Screening Committee to examine resolution of such loans within 180 days and if there is no resolution in 180 days, then these bad assets will be moved to the National Company Law Tribunal (NCLT).

• Resolution of loans above Rs 500 crore: The loans above Rs 500 crore will be dealt via AMC/AIF-led resolution process. The panel proposed creation of a national Asset Management Company (AMC) to take over such Non-Performing Assets from banks.

Recommendations included creating platforms where banks can trade in bunched loan assets.

Creation of National Asset Management Company (AMC)

  • The committee suggested setting up of an AMC with an equity contribution from banks, foreign funds and infrastructure funds such as the National Infrastructure Investment Fund (NIIF).
  • The AMC could be set up under an existing Asset Reconstruction Company (ARC) like Arcil Ltd which is already promoted by banks.
  • The National AMC will determine the price of individual accounts after due diligence and once the asset is sold, turnaround specialists would be appointed. The asset would be sold down to strategic buyers over a period of time.
  • The plan to set up a national ARC or AMC over and above existing private ARCs come amid the mounting bad loans in the system leading to bleeding balance sheets of banks.

Significance

Project Sashakt (recommendations) will help retain the value of the asset through operational turnaround. Sashakt aims to strengthen the credit capacity, credit culture and credit portfolio of public sector banks. However, Sashakt does not require any regulatory forbearance.

Constitution of the Sunil Mehta Committee to set up Asset Reconstruction Company

Finance Minister Piyush Goyal in June 2018 constituted the committee led by Punjab National Bank Chairman Sunil Mehta to look at the feasibility of a ‘bad bank’-like structure and give recommendations on formation of an Asset Reconstruction Company in two weeks time.

The committee included State Bank of India chairman Rajnish Kumar, Bank of Baroda managing director and chief executive officer P.S. Jayakumar and SBI deputy managing director C. Venkat Nageswar.

Comment

The bankers’ panel has suggested the need to take the function of NPA management out of the banks, thus, suggesting the banks to focus on core banking activities of lending and growing their balance sheets.

They opine that the transfer of NPA management to a specialised entity would help clean up the long due loans and experts can help restructure the loans.

As on March 31, 2018, bad loans across listed banks stood at over Rs 10 lakh crore. As per the RBI’s recently released Financial Stability Report, the number of gross NPA ratio is set to rise by March 2019 to 12.2 percent from 11.6 percent in March 2018.

 

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