In December, 2018, the ‘Sashakt’ plan for resolution of stressed assets outside the insolvency courts has been made operational. The move is expected to help in resolution of over 1,000 assets worth Rs 3 trillion.
What is the ‘Sashakt’ scheme?
On the recommendations of the Sunil Mehta Committee, the government has launched the ‘Sashakt Scheme’ (as a complimentary scheme with Insolvency and Bankruptcy Code (IBC)) for the resolution of bad loans.
What challenges is the IBC framework facing? – While the Insolvency and Bankruptcy Code, 2016, process provides a transparent and independent mechanism for resolving bad loans, the swelling load of bad loans and NPAs on the Indian banking system is still substantial. Some challenges the IBC framework faces are overburdened National Company Law Tribunal (NCLT), and severe depletion of value considering several assets (especially power assets) have been in the market for some time and found no takers. Sashakt seeks to stem some of these effects, while at the same time ensuring that NPAs are dealt with adequately.
The Sashakt scheme proposes a five-pronged approach:
- Resolution of loans up to `50 crore by lenders within a period of 90 days;
- Resolution of loans between `50 crore and `500 crore within 180 days, with the lead lender taking charge;
- For assets up to `500 crore, an independent asset management company (AMC) would be created that will be funded by alternative investment funds (AIF);
- The NCLT/IBC process; and
- Setting up of a platform for trading assets.
Inter-creditor agreement under the scheme:
Several banks have entered into an inter-creditor agreement (ICA) as part of the Sashakt scheme in relation to loans above Rs 50 crore. The ICA permits the lead lender to formulate the resolution plan and all decisions are to be guided by majority lenders, i.e. those with 66% share in the aggregate exposure. If any lender dissents, the lead lender has the right but not the obligation to buy-out dissenting lenders at a value equal to 85% of the lower of liquidation value or resolution value.
Under the ICA framework, decision-making would be by way of approval of ‘majority lenders’ — those with 66 per cent shares in aggregate exposure. Once the majority of the lenders approve a plan, it would be binding on all other lenders that are party to the ICA.
The ICA will be voluntary for banks and the mechanism will help iron out the problems faced in consortium lending, help the banks work as a team and remove procedural glitches to ensure timely availability of credit to enterprises.
Asset Management Companies:
The other key aspect of Sashakt is parking of stressed assets in an asset management company (AMC). Lenders are required to set up a new AMC (or use existing asset reconstruction companies like the Asset Reconstruction Company India Ltd) with alternative investment funds (AIFs). An AIF can raise funds from institutional investors, as well as banks, which it will use in investing in stressed assets acquired by AMCs, and AMCs will use these funds to issue security receipts to banks against bad loans that are to be redeemed within 60 days. This will be a market-driven process, considering that other AMCs/AIFs will be permitted to bid for these assets and match the national AMC/ARCIL’s price, which will be treated as the floor price.
An asset management company, known as Sashakt India Asset Management, has also been set up for large loan accounts, with exposure spread across multiple banks and with a potential for turnaround. This would be applicable for loan assets valued above Rs 5 billion.
Sashakt vs. IBC
The Sashakt approach will be a cleaner and quicker exit for them compared to IBC, which we have seen usually stretches beyond the mandated 270-day period. Under Sashakt, lenders will be able to transfer NPAs onto the books of the AMC immediately, and ARCs will have the opportunity to revive the asset, which is relevant for the power sector, considering the ministry of power’s recent push to revive stressed assets—for example, pilot schemes for power purchase and proposal of a national discom. Also, unlike in IBC, where lenders have to face questions relating to massive haircuts, the burden of price fixation is no longer on lenders, with price discovery being a welcome initiative.