Have you heard about Asset Management Companies (AMCs)?

Of course, you have, especially if you invest in mutual funds.

However, the term AMC may have different connotations.

Those managing your investments, try to acquire sound assets and maximise your gains. They avoid taking undue risks.

Can you imagine, some AMCs purposefully invest in poor quality assets, and they especially look for troubled companies? Their primary aim is to clear the systemic mess.

In coming days, the Government may encourage private and Government-funded AMCs, which also called Asset Restructuring Companies (ARCs), to take over the stressed assets of banks. 

Dr Viral Acharya, Deputy Governor of RBI, has advocated a two-step strategy to address the systemic problem of bad asset quality. As you may know, 42 Indian banks have amassed close to Rs 7.32 lakh crore worth Non-Performing Assets (NPAs) on their balance sheets at the end of Q3, FY 2016-17.

In the second half of 2015, RBI had started taking the asset quality review of banks. However, nothing much has changed since then, and the recovery of troubled assets has been moving at a snail's pace. Dr Acharya, in one of his speeches recently, warned against the dire consequences of status quo.  According to the RBI deputy governor, "It is reminiscent of weak banks and stagnating growth witnessed by Japan in the 1990s, with repercussions to date, and by Italy since 2010. Japan has experienced, and Italy, is in my opinion experiencing, a lost decade. I believe we are at crossroads and have an important choice to make.''

In short, he's warned against the potential downside of maintaining status quo and dragging the problem to future hoping that, something will happen (naturally) that will help to address the problem at hand.

Dr Acharya has urged the Government, banks and other private players to swing into action without wasting time. He recommended that private AMCs shall take over, troubled assets that still hold reasonable economic value and can be put back in business by taking a moderate haircut,. As per his assessment industries such as Metals, EPC, Telecom, and Textiles can be considered for this purpose.

As against that, the Government backed ARCs shall rescue sectors which are sailing through hot waters.  The power sector is an apt example. The sector is not only struggling with the problem of overcapacity but has been dealing with the pain of economic unviability as well.

The deputy governor has also lashed out on Public Sector Banks (PSBs) for making inefficient use of recapitalisation schemes in the past.

He has prescribed a 5-point agenda for improving the efficiency of banks in dealing with bad assets which is as follows:
 

1. Capital raising
2. Sale of assets
3. Mergers
4. Tougher corrective measures
5. Divestments

In response to the observations made by Dr Acharya, bankers have reacted cautiously. They believe the present system of provisioning offers no incentive for the speedy resolution. Rather it's another way round, faster resolutions come with a requirement of higher provisioning which dents into the profits of banks.

What's the real issue at hand?
 

• Constrained capital
• Lack of risk appetite
• Operational hurdles
• And to an extent, lack of will

It is estimated that out of Rs 7.32 lakh crore worth NPAs, asset worth Rs 3 lakh crore or thereabouts are severely stressed and may not have much realisable value. Banks have already provided Rs 2 lakh crore to cover up losses on account of these assets. Still, we fall short of Rs 1 lakh crore worth provisions. This may take another 1 year to cover them completely.

The question is can we afford to wait for so long?

As you can imagine, it takes courage to accept 30%-40% haircut on assets, and it requires even greater courage and acumen to turn them around. Under such a scenario, the seller of bad asset and the buyer of the bad asset, both, may shy away from making a move.

To bail out banks, the Government will have to deal with multiple issues at a time. The most important question is whether Government spends taxpayer's money on social causes such as education and healthcare or shall it use it for bailing out banks. There is a political risk that the Government may be accused of being selective in helping select business houses.

Is Government to run that chance and take the opposition head on critical issues?

Striking balance is the key.

While it's absolutely essential to break the impasse decisively, it's equally important to make banks more accountable for their decision. Public banks must demonstrate the disciplined approach. Divesting stake from PSBs and merging banks on their merits would be a sensible move to stop interference of the Government in decisions that are to be taken at the level of banks.

Let's not forget the present asset quality issues have roots in the reckless lending of past and Government's interference in yesteryears.

For Indian economy to grow at a faster rate, it's imperative that banks remain healthy and well-capitalise to fund the future of India.

Dr Acharya, so far so good.

Hopefully, he will be able to break the ice with all concerned parties—banks, Government and stressed companies.

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