PROJECT SASHAKT

THE INTRODUCTION

The NPA problem in Indian Banks is on a surge since a few years and no efforts until Insolvency and
Bankruptcy Code’s (IBC) launch have proven its ground to lessen the burden of NPA’s on bank’s balance
sheet. In February this year the RBI scrapped all the mechanisms like Credit Debt Restructuring (CDR),
Structuring of Stressed Assets (S4A), Strategic Debt Restructuring (SDR) etc. which further urged banks
to develop a better solution. No doubt, the IBC is active and is on the pathway to solve the problems,
but it is still a new framework, which in turn means that it will take some time in settling down with a
robust execution plan. Hence arising out of this need was a proposal suggested by Sunil Mehta
Committee (PNB Chairman) which will be an inter bank framework to manage their own Non
Performing Assets (NPA’s) with a resolution plan developed by the consortium of Banks themselves.

THE PROPOSAL

Here is how the committee proposes to segregate and deal with loans of varying levels:

Upto 50 cr 50 to 500 cr Above 500 cr

• Resolution plan within • Banks to form inter- • AMC structure to be

90 days
• Steering committee to
be set up
• Cases to be referred to
National Company
Law Tribunal after 90
days
creditor agreements
• Lead lender to create
resolution plan
• 66% lenders must
approve the
resolution
put in place
• To buy assets from
consortium of banks
• To turnaround the
stressed assets
THE PROCESS

AIF-AMC will
now control Bank sells
the acquired NPA worth
asset & turn it 700 cr to ARC
around

ARC
The ARC
approaches
purchases it
AMC and in
for Rs. 200
turn to AIF for
cr(haircut)
the 100 crore

ARC issues
security
worth 100 cr
& pays the
rest 100 cr in
cash

The Asset Management Company (AMC) has to redeem the security issued to banks within 60 days. The
new AMC-Alternative Investment Fund (AIF) has to own at least 76% stake in the asset.

THE POSITIVES

Project Sashakt is a banker led initiative, hence the banks can mutually decide on the action plan to be
undertaken for the NPA. Inter Creditor Agreement (ICA) will be ratified by The Board of Directors of the
banks entering into the agreement which means banks are taking a conscious decision. It is a voluntary
move rather than being a regulatory one like the Joint Lenders Forum (JLF)

The government is not going to interfere in the whole process which leads to a solution that banks
themselves are willing to accept.

THE CHALLENGES

Lack of sufficient finances – The AMC’s needs to raise money for the NPA’s which in itself is an obstacle
given that there are not many takers for these stressed assets.
[Source: Bloomberg]

Deep Haircuts- The banks should be willing to take deep discounts for their NPA’s in order for it to be
sold.

Overlapping with IBC – RBI in its February circular said that all stressed assets worth more than 2000
crores if not resolved within 6 months should be taken to NCLT. This accounts for about 70 big
companies with loan amounting to Rs. 3.2 lakh crores. So Sashakt will essentially look into loans in SME
sector which has value lesser than 2000 crores.

Consensus on resolution plan- Some banks may have secured loan and others may have unsecured loan
so to reach an agreement that takes into account the charges against the assets and to equalize the
process for all banks remains a challenge.

Many banks have sold their assets to Asset Restructuring Company’s (ARC’s) so Inter Creditor
Agreement should take into consideration the other institutes as well which own the NPA’s.

Banks investing in AIF- No bank can contribute more than 10% in AIF and even so whatever amount has
been contributed, the bank has to maintain a 150% capital charge.

49:51 – The deal is to get 51% of non-government ownership in AIF which is a huge challenge.

Pool of disbursed assets- Since NPA’s above 2000crore are going to National Company Law Tribunal
(NCLT), the small loans which are spread over various banks might not be as attractive to the ARC’s
because they have to deal with a complex structure and less attractive amounts.
THE CONCLUSION

Project Sashakt if well aligned to IBC will clean up banks balance sheet. Though it is not a new
framework in the first place, even earlier there have been efforts made to develop an AMC-ARC
structure. The major difference this time is that the Inter creditor agreement is a stronger plan as
compared to earlier Joint Lenders forum (which was scrapped by RBI). More so the time is ticking for
NPA’s that have stuck to the banks for so long. Essentially banks have only few options to resolve the
whole mess –

1. IBC

2. Project Sashakt

3. Writing it off.

Of course the better way would be to use the first two options rather than cutting down on their capital
and profits.