The finance ministry's decision to have a new fast-track debt resolution programme for public sector banks with the help of asset management companies (AMCs) may undermine the Insolvency and Bankruptcy Code (IBC) process, brought in with much 'fanfare' to resolve the non-performing assets (NPAs) in the banking system, experts said.
"Only few large cases may end up at IBC," many government officials as well legal experts said.
The IBC was seen as a game-changer policy of the Narendra Modi government in resolving NPAs. It allowed any lender to drag a defaulter to the court to recover the dues and focused on early recognition of NPA problem. One-and-a-half years after the IBC was implemented, the government has come up with a new plan to tackle bad loans of banks for faster resolution of bad loans and restore credit flow to corporates.
The new three-tier resolution mechanism named Project Sashakt was announced by finance minister Piyush Goyal on Monday to tackle bad loans of Rs 8.3 lakh crore.
Under this, small loans up to Rs 50 crore can be handled at the individual bank level. The second category of loans between Rs 50 crore and Rs 500 crore will be dealt with by authorising the lead bank through interbank agreements to execute a resolution plan within 180 days. Else it will head to National Company Law Tribunal (NCLT). The loans above Rs 500 crore will go through a three-stage mechanism involving asset reconstruction company (ARC), alternative investment fund (AIF) and AMC. About 200 companies fall under this category of loans. An AMC will collaborate with AIF to buy stressed assets from banks through an ARC. Banks too can have a stake in the AIF and the management company.
"This structure is an upstream of IBC. All the cases will go through the new system before IBC," said a finance ministry official. "We don't want to clutter around NCLT. If no resolution is reached at this stage, then the IBC process will follow," said another official.
"To make sure that the IBC doesn't get overwhelmed, bankers themselves are creating an ecosystem where different institutions buy, sell and manage the assets," the official said.
However, principal advisor to the finance ministry Sanjeev Sanyal doesn't see it as an alternative of IBC, but the enhancement to the insolvency framework. "This gamut of institutional arrangements should create a wider ecosystem to allow the IBC process to run more smoothly," he said.
Asked whether Cabinet or regulatory approval will be required, Sunil Mehta, PNB chairman and head of the committee that proposed project Sashakt, said, "It is an arrangement between banks. The government is not involved in the implementation." While many in the government feel such arrangement requires to be backed by law, according to Mehta, "the inter creditor agreement" which was finalised today at a bankers' meeting attended by the finance minster in Delhi, "was a legal document and was enforceable in any court of law. It is not in conflict with IBC."
The government as well as banks don't want all the cases to head to IBC, sources said. "After top 50 cases had gone to the IBC, a need to have a mechanism for the rest of thousands of cases. All of them couldn't go to the NCLT. So it was decided that we would need an ecosystem and a committee was set up to suggest steps," a source said.
Bankers are of the view that bankruptcy process involving NCLT and IBC is causing heavy losses to banks, threatening their viability. "The IBC and NCLT based resolution processes have so far yielded worse results with the lenders having to take far higher haircuts than many of the repealed debt resolution schemes," said a banker on the condition of anonymity.
"While the new resolution process may lead to an increase in the pool of applicants for the stressed assets, it could also result in ever-greening of the assets to escape IBC," said Ramakant Rai of law firm Trilegal.
Many feel that there would also be political pressure on the government to deal with the NPA problem in a different way.
"With liquidation would have come job losses and unemployment. In an election year, no government would want that," said a government official.
Meanwhile, former banking secretary D K Mittal sees it as just a mechanism to push away the problem. "No banker would like to settle cases at a price below than what is due because of the prevailing climate of lack of trust in the banker," he said.
"It may well give more time for resolution and not put pressure due to RBI circular," said Sakate Khaitan of Khaitan Legal Associates.
A February 12 circular of the Reserve Bank of India (RBI) requires banks to finalise a resolution plan in case of a default on large accounts of Rs 2,000 crore and above within 180 days after the borrower misses a payment without allowing even a day's extension, failing which insolvency proceedings under IBC will have to be invoked against the defaulter. RBI has also done away with the traditional restructuring schemes. This had stirred a hornet's nest with banks, corporate and even the government opposing it.
PROJECT SASHAKT
- Up to Rs 50 cr loans
Can be handled at the individual bank level
- For Rs 50-500 cr
The lead bank would execute resolution plan within 180 days, else cases will head to NCLT
- Above Rs 500 cr
The bankers will decide through a three-tier mechanism
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