Covid-19: Banks Look To Float AMC To Deal With Bad Loans

Fearing a spurt in bad loans due to the impact of the Covid-19 pandemic, banks are looking to revive a two-year old proposal to jointly float an independent asset management company (AMC) and an alternative investment fund (AIF) to help them with faster resolution of big-ticket stressed assets.

The proposal, first mooted by a committee headed by Sunil Mehta, was a non-starter earlier due to capital constraints as banks had to set aside resources for bad loan provisioning. Further, lack of consensus on price discovery and discount at which the stressed assets can be sold by banks to the AMC proved to be a stumbling block.

But now with bankers expecting slippages to rise due to the ripple impact of the pandemic, the proposal gets a new lease of life under the aegis of the Indian Banks’ Association (IBA). The Association will be sounding the RBI and the Finance Ministry out regarding the proposal.

Bankers’ opine that instead of a potential buyer approaching each bank to buy its share of exposure to a stressed asset, if the same is consolidated under an AMC, the asset resolutions could gain momentum.

The Sunil Mehta Committee, in a report submitted in July 2018 to the then finance minister Piyush Goyal, had pitched for an AMC/AIF-led resolution approach for stressed loans above ₹500 crore. Mehta was then Non-Executive Chairman of Punjab National Bank.

Crisil, in a report “Viral fever: Covid-19 impact on economy, corporate revenue and profitability”, has estimated banks’ gross non-performing assets (GNPAs) to rise to 150-200 basis points (bps) in FY21 to 11-11.5 per cent (from 9.5 per cent projected in FY20) due to higher slippage and lower recovery. One basis point is equal to one-hundredth of a percentage point.

“The pandemic-led economic slowdown should result in higher incremental slippage in the current fiscal (3.9 per cent of net advances). Lockdown to impact collections and resolutions – (bad loan) reductions to halve in fiscal 2021 compared with fiscal 2020, thus increasing NPAs,” the report said.

Meanwhile, the Confederation of Indian Industry has suggested the Government that for meeting the credit needs of the real sector, as well as absorbing some shocks from potential insolvencies in the real sector, an allocation of ₹2-lakh crore for bank recapitalisation is required.