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RBI (RESOLUTION MECHANISMS (Project Sashakth: Recommendation (Constraints…

- - - - Steering Committee by the banks for
        formulating and validating the schemes, with provision for additional funds
      - Resolution should be completed in 90 days
      - Resolution of these assets should be under single bank's control , with bank having liberty to customize it
    - - Bank-Led Resolution Approach, with resolution to be achieved in 180 days
      - resolution plan is to be approved by
        lenders holding at least 66% of debt
      - The independent steering committee
        appointed by the Indian Banks Association has to validate process in 30 days
    - - an independent Asset
        Management Company AMC is to be set up
      - Alternative Investment Fund would raise
        funds from the institutional investors.
      - Banks would also be given an option to
        invest in this fund, if they wish
      - AIF can bid in assets for NCLT
      - Security receipts have to be redeemed
        within 60 days.
  - - - MSMEs is a complex issue and finding
        solution within 90 days is a difficult task
      - Power sector, investment i Asset management company is real problem
    - - It runs contrary to RBI directions and implementation is the real challenge
- - - - Several banks finance a borrower based on common appraisal and documentation
      - All banks conduct joint supervision and follow up exercises
      - Considered a must for big-ticket loans of >500cr, to stem fraud and rise of bad loans in system
      - Why it failed?
        
        Inability of PSB to share information about bad account on time leading to increase in number of frauds
        
        Loopholes in process control and credit monitoring by state owned banks
        
        PSU try to work in isolation
    - - Agreement among banks that have dues from a borrower in stress. It mandates the lead bank to formulate a resolution plan that will be executed timely
      - All corporate loans >50cr are covered, if 2/3rd lender agree in terms of aggregate exposure, then it becomes binding on all binders
      - Dissenting lenders have exit route
        -by selling their exposure at 15%
        -or buying other lenders at 25% premium
      - Applicable for All consortium lending & Multiple banking arrangements for amount >50cr
    - - RBI in February dismantled all existing resolution mechanisms, and asked lenders to start resolution for asset, even if default by a day
      - If resolution plan wasn't finalized in 180 days, account would be referred for bankruptcy under IBC
      - Pros of decision
        
        Gives flexibility for viable resolution plan to banks
        
        Keeps RBI away from mandating banks to file insolvency petitions using IBC
        
        Provides freedom to banks to convert debt to equity
        
        Objections of creditors solved through ICA-->improvement on the earlier model
      - Cons
        
        Time-bound resolution-->unintended consequences. Banks may be compelled to engage in quick sale of stressed assets due to deadlines
        
        It is against interest of lenders who look for best price for stressed assets
        
        No bad loan buyers, hence not a solution
    - - For scheme to work, bankers need protection from arbitrary arrests and criminalisation of workers
      - Fear of govt vigilance from bankers mind need to be removed, hence unresolution likely to remain