Is 'bad bank' proposal aimed at accommodating infra sectors?
Acting Finance Minister Piyush Goyal sort of set the cat amongst the pigeons last week by bringing back the "bad bank" proposal for addressing the bad loan problem. But Goyal's meeting with banks CEO resulted in giving the idea of a 'bad bank' a shot. They have decided to set up a committee under the chairmanship of Sunil Mehta, non executive chairman of Punjab National Bank, to examine whether it makes sense to set up an Asset Restructuring Company (ARC) or an Asset Management Company (AMC) to deal with the distressed assets in the banking system. There are many possible reasons for going in for a parallel mechanism along with IBC which is time bound. No one size fits all -- The bankers are not very happy with IBC as resolutions are resulting in huge hair cuts. The IBC will take time to emerge as a value maximiser for banks as they are already facing too many issues on many fronts. Power sector woes --- The power sector stressed loans doesn't fit into the IBC mechanism. Many of the power loans are facing defaults because of lack of coal linkages and also absence of power purchase agreements (PPAs) because of excess power capacity. The state governments are not signing PPAs because power is available over exchanges at a much cheaper cost. An AMC or an ARC structure would help banks in parking these loans to a separate agency, which will find a resolution over a period of time. No strategic interest -- Given the excess capacity in many sectors and a slowdown in the economy , there is also a demand issue. There is lack of interest from strategic players because of the future demand supply scenario. These assets will go directly to liquidation under the IBC, which means a loss of productive assets. The bankers feel such assets should go to an AMC or ARC . Global capital staying away -- There is also a limitation in terms of capital. The foreign capital is not coming because of several amendments in the IBC. They feel IBC would take time to stabilize as many promoters are challenging the provisions of the act. In this interim period , it make sense to have a vehicle to resolve and address the stressed loan issue. Real estate problems -- There are also issues in the real estate sector where IBC is not offering a quick resolution. While the government has done amendments in the IBC by allowing flat owners as financial creditors, the real challenge or test will come when cases will come up for hearing. Many say such cases can be easily managed outside IBC or under an AMC mechanism.