Punjab National Bank (PNB) Chairman Sunil Mehta committee suggested the setting up of an independent Asset Management Company (AMC) for stressed loans
The Government of India unveiled “Project Sashakt” in July 2018 based on the recommendations of a report filed by a committee led by Punjab National Bank (PNB) Chairman Sunil Mehta. The recommendations were meant to facilitate the process of faster resolution of the Non Performing Assets (NPA) problem of India’s banking sector. A strategy was accordingly drawn up and implemented to tackle the stress plaguing the balance sheets of a majority of public sector banks in the country.
The recommendations mooted the management of bad loans of upto 50 crore at the bank level with a 90-day resolution deadline. Banks were mandated to enter into an intercreditor agreement (ICA) for NPAs of Rs 50-500 crore with the bank authorized to implement a 180-day resolution timeframe else the case could be referred to NCLT. The Sunil Mehta committee suggested the setting up of an independent Asset Management Company (AMC) for stressed loans in excess of Rs 500 crore which would receive institutional funding through an Alternative Investment Fund (AIF).
The recommendations of the Sunil Mehta committee report were implemented quite successfully to a greater extent. However, the template for the creation of a distressed assets market in emerging economies like India as envisioned by the committee has not seen the light of day. The country has witnessed bad loans clocking a compound annual growth rate of 30% from 2010 to 2019 and touching base at USD 134 billion. Creating a conducive environment for the buyout of stressed assets through the roll-out of requisite policy interventions should be the priority focus of the government.
The outbreak of the covid-19 pandemic has not only created an unprecedented health crisis on a global scale but also created unparalleled economic turbulence the world over. As the country comes out of an extended lockdown, it is estimated that the pandemic has compounded the NPA problem in the banking sector which was already aggravated by a slowing domestic economy.
Driven by the impact of the covid-19 pandemic and rising stress /cashflow mismatch in many businesses, the bad loan situation is expected to worsen greatly during 3rd/4th quarter of current financial year, even if banks/borrowers gets temporary reprieve, helping them with postponement of provisioning with the 6 month’s moratorium period available. Bad loans in the banking sector is expected to witness a steep rise and as a result increase in the volume of stressed assets being put on the block by lenders in the later half of current financial year.
Given the sheer size and scale of NPAs, the stressed assets market in the country could be witness to the next big investment wave. Global investors, special situation funds and distressed asset managers, chasing greater returns, are likely to make a beeline for claiming their share of assets in a maturing market. As the markets witness a substantial rise in bad debt, not because of fundamental issues or faulty business models but largely due to mismatch in earning cycle of most businesses due to pandemic shock, there would be a consequent rise in the number of distressed assets and therefore there is a high scope for increased action in this beleaguered segment. As asset valuations become highly realistic with the outbreak of COVID-19, special situation funds may find it attractive to infuse capital for making inroads in the stressed assets sector and expect increased return on investment (RoI) once the market bounces back to normalcy.
As per data collated from the “Credit Suisse family 1000 in 2018” report brought out by the Credit Suisse Research Institute (CSRI), India has the third-largest number of family-owned businesses in the world. Concentrated ownership, poor transparency, lack of exposure and the apparent lack of fair play in decision-making leads to the operational structure of family-owned enterprises becoming opaque. Such family-owned firms largely belong to the mid-cap segment where the implementation of corporate governance in areas like appointment of successors to the company board and disclosure of the company’s finances can emerge as a key challenge area. Hence, they face key corporate governance challenges in areas like accounting standards, financial prudence & appointment of successors to the company board.
With the changing markets, many companies will need to strengthen their balance sheet and would badly need capital to get going. A high level of dominance by the promoters in day-to-day affairs and vested interest in holding tight control can make the acquisition of such companies a highly difficult proposition, even if the much needed capital would provide them a lifeline.
With the implementation of IBC code and precedence of multiple cases of change in control through IBC, companies in default with weak corporate governance or improper track record will find it difficult to gain support from the lending or investee community. Such a situation will open doors for many opportunistic investments or pre-packaged deals leading to consolidation in the industry. If companies remain open for passing on controls in the efficient hands, adopt higher standards of excellence in corporate governance and implement the proper succession planning norms, they can also be valued at significantly higher valuations.