Concerns with Mehta Panel Report

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What is the issue?      

• The Sunil Mehta Committee submitted a five-point plan on bad loan resolution.
• But the recommendations are less likely to be an immediate solution for early resolution of NPAs.

What are the concerns?

• Approach - Large banks helping smaller lead banks to run the resolution process, if required, sounds an ineffective suggestion.
• The bank-led resolution approach has largely failed in the past.
• Clearly, this is the reason why alternative plans to resolve NPAs quickly are being sought.
• Consensus - The lead bank's resolution plan to be approved by 66% of the lenders (by value) merely replaces the earlier JLF.
• The JLF (joint lenders’ forum) structure failed miserably as it fell short of building consensus.
• The present committee report has missed to address this real challenge.
• Small banks - The structure also fails to serve the interests of smaller banks.
• If restructuring involves additional finance, small banks may be affected.
• As, unlike the larger ones, smaller banks may not prefer giving good money after the bad loans.
• Reconstruction - The report points out the lacunae in the existing functioning of asset reconstruction companies (ARCs).
• But it fails to address how such issues will be tackled under the proposed AMC or AIF structure.
• Success of price discovery through open auction under AMC/AIF depends on banks' willingness and capability to take financial risks.
• Clearly, unattractive returns and poor recovery rates have discouraged investors from bringing in capital in the past.
• Complex - The objective of early resolution to NPAs may be hampered by complicated work processes.
• E.g. there is lack of clarity on how AIFs will work with a series of AMCs for a quick resolution.
• Also, there are 26 ARCs and a couple of resolution advisory service companies in operation.
• Given this, creation of new platforms like the AMC in AIFs for NPA resolution seems illogical.

What is the way forward?

• Quick-fixes like utilising healthy banks' or institutions' assets to rescue stressed banks may not be sustainable.
• The long awaited structural reforms for the banks are:

1. empowering the bank boards
2. setting a roadmap for consolidation
3. Centre diluting its stake in PSBs

• These have to be paid attention to, and the Centre has to push through these reforms.

Source: BusinessLine