Why in news?
The Sunil Mehta Committee submitted a five-point plan on bad loan resolution.
What are the key recommendations?
- The Committee was set up for restructuring stressed assets and creating more value for public sector banks (PSBs).
- It has proposed Project Sashakt to recover banks and stressed companies.
- The five-pronged resolution route outlines five features for bank resolution:
- an SME resolution approach
- bank-led resolution approach
- AMC/AIF led resolution approach
- NCLT/IBC approach
- asset-trading platform
- This route will be applicable to the following, which have a potential for turnaround -
- smaller assets with exposure up to Rs.50 crore
- mid-size assets between Rs.50 crore and Rs.500 crore
- large assets with exposure of Rs.500 crore and more
- Large assets - For large assets, an independent asset management company (AMC) will be set up.
- The resolution route is also applicable to larger assets already before the National Company Law Tribunal (NCLT).
- It would also cover any other asset whose resolution is still pending.
- The process will cover both performing and non-performing assets.
- Mid-size assets - The committee called for a bank-led resolution approach for these.
- The resolution plan has to be approved by lenders holding at least 66% of the debt.
- The independent steering committee appointed by the Indian Banks Association (IBA) has to validate the process within 30 days.
- The resolution for this category would be achieved in 180 days.
- In this category, the key challenge would be to arrive at a consensus.
- This is because the exposure is held by multiple banks/lenders.
- SMEs - The committee suggested setting up of a steering committee by banks for SMEs resolution.
- This will formulate and validate the schemes, with a provision for additional funds.
- The resolution should be complete within 90 days.
- It also suggested that the resolution be under a single bank’s control.
- The bank will have the liberty to customise the resolution process.
- AIF - Alternative investment fund (AIF) would raise funds from institutional investors.
- Banks would be given an option to invest in this fund if they wish.
- AIFs can also bid for assets in National Company Law Tribunal (NCLT).
- The lead bank can discover price discovery through the open auction route.
What is the significance?
- The recommendations offer a transparent market-based solution and are fully compliant with RBI regulations.
- It focusses on asset turnaround to ensure job protection and creation.
- The resolution process would help bring in credible long-term external capital.
- This could limit the burden on the domestic banking sector.
- It could also ensure robust governance and credit architecture and prevent any build-up of NPAs in the future.
