The government Monday accepted the Sunil Mehta Committee’s five-pronged strategy to resolve the spiralling NPA mess. The move comes after several false starts and unsuccessful attempts by the RBI to rid the banking system of bad loans. Among the proposals, the committee suggested separate strategies for Rs 50 crore to Rs 500 crore loans and those above Rs 500 crore. Coincidentally, both categories have about 200 accounts aggregating Rs 3.1 lakh crore each.
Theoretically, the approach sounds logical, but not in reality. It’s an open secret that for large accounts, banks resorted to evergreening to avoid defaults. Consequently, secured debt with sufficient collateral fell significantly, implying that loan recoveries could be minimal.
Perhaps, that’s the reason why the Committee proposed an Asset Management Company or an Alternate Investment Fund to pool the rubbish bits into a consolidated financial dustbin. Such a move will lower provisioning needs, and release regulatory capital. The idea of corralling toxic loans into an independent entity isn’t entirely an untested concept. In the past, when NPAs shot through the roof during 2000s, nationalised banks had set up Arcil to park the mistakes of the past, but its performance was muted. It’s rather puzzling why banks want a repeat, particularly when private players like KKR and Blackstone are waiting in the wings hoping to find some jewels among the junk.
There are 24 private ARCs, but they are unwilling to buy troubled assets at a price favourable to banks, who may want an entity that’ll do its bidding. The goods news though is, their value will be determined by an auction. But shedding of Rs 6.2 lakh crore worth assets doesn’t warrant a turnaround in itself. Lenders should speed up resolution or liquidation process for accounts with secured debt to begin with. The NDA government now has only one shot at getting it right before the 2019 elections, so it should pay attention not to blow up precious cash for the trash.
