Earlier RBI’s proposal of mandating banks to start the resolution process under IBC for large accounts are to be considered defaulted for even a single day of delay.
Such pressure of carrying out resolution mechanism has turned many companies got wound up under IBC law. This ruling is the direct result of overburdened cases that carry the power of liquidating. Earlier provisions of many laws have been consolidated to give more teeth to this quasi-judicial body for any kind of commercial arbitration to be resolved in a time-bound manner. But the overburdened cases tend to fundamentally deviate from the objective of resolution process as many companies have been subjected to the ruling of liquidation.
It raises concerns for banks since the value of assets was not recovered under IBC and those subjected parties have been liquidated or merged with other entities. Since government is the largest stakeholder of such loss-making entities(banks), it set up a committee under ex-chairman of PNB Sunil Mehta. The proposal has been widely accepted.
The recommendations suggested for those companies whose stressed assets are over and above 500 crores to be taken over by an independent asset management company or existing ARC’s(Asset reconstruction company).
The government came up with an inter-creditor agreement that allows the financially viable banks to take over the assets of weaker banks. Initially, those banks which have been categorized under prompt corrective action(PCA) framework of RBI has been subjected to be sold to ARC by issuing security receipts.
The alternative investment fund(AIF) by government allows this selling mechanism to be carried out in a transparent mechanism driven by market forces. The assets being sold in the trading platform whereby prices are being discovered. It also helps to overcome the issue of the prices of such assets fixed arbitrairly by the bankers. During IBC proceeding such practical difficulties not only delays the resolution process but impacts the operation of the banking system.
The suggested shashakt program by government tends to offload the stressed asset of the companies from their balance sheet. But this solution is only short term as establishing asset reconstruction companies(ARC’s) is not a new process.
The long-term structural reform has to come from the operational autonomy of banks. In India banks are not just a commercial business but also mandated to perform social inclusion programs as has been seen in the implementation of opening Jandhan accounts. The spike in NPA’s in infrastructure sector also been faulted for the mismatch in the decision by the government to banks in pushing the growth of infrastructure. It calls for a viable bond market that funds for a long-term viability of the projects.
In order to function banks as commercial entities government need to appoint it’s directors to the boards in a professional manner. It tends to helps the banks in keeping at par with the standard regulation set by RBI. Otherwise weak regulatory practices often end up in scandalous nature of institutional norms like those witnessed in PNB scam. However, the government is also moving in such a direction to secure the public money. So that the capital requirements of the banks are met from the market.