New Delhi: Doubts have started surfacing over the recommendations of the Sunil Mehta-committee on bad loan resolution, within a week of the government accepting them as a win-win solution for all.

The committee suggested the creation of an asset management company (AMC) and an alternative investment fund (AIF) to buy out the toxic assets of bleeding PSU banks but questions are being raised about its funding and the amount of bank write-off on a loan (haircut).

The plan, presented to the finance ministry, calls for an AMC taking over some Rs 3.1 lakh crore worth of toxic assets, where each of the 200 loans in question are over Rs 500 crore, to either turn them around or sell them at a profit.

"On paper, it sounds good. A PSU bank sells its toxic assets to the AIF at a discount, writes off losses and then goes back to the business of normal lending. In practice, the problem is that who will fund this model," said top finance ministry officials.

What makes it tough for a PSU bank to sell off a toxic asset at a huge discount are the inevitable enquiries on whether the deal was a bonafide one or one done in bad faith where some money was made on the sly during the selloff.

Without formally creating a bad bank, the Mehta committee's recommendation puts up a similar architecture which will take the responsibility for the actual sale of toxic assets off the hands of PSU bankers.

The gross non-performing assets of listed banks rose to Rs 10.3 lakh crore at the end of the March 2018 quarter.

Bankers fear this figure will go up in the coming quarters. The latest Financial Stability Report brought out by the Reserve Bank cautions that gross bad loans may rise to 12.2 per cent of the total loans by March 2019 from 11.6 per cent as of March 2018.

However, the problem lies in funding the AIF and the AMC and in realising some part of the toxic loan for the PSU banks. PSU bankers are adamant that they would not pay for more than 50 per cent of the money needed to fund the buying of toxic assets whose real value may be questionable.

First, to get this money, the AIF has to raise funds for that large an amount, an uphill task in any financial system. "Even when starting small, let us say a fund of Rs 20,000 crore for such toxic assets, I do not foresee India's private financial institutions forking out such huge sums, especially when PSU banks expect reasonable returns... private financiers, especially global ones want cheap valuations and high profits," said Amit Bannerjee, an independent merchant banker dealing with East Asian funds.

Foreign funds are suspicious of India's long-winded legal processes and, hence, hesitant to shell out money for toxic assets.

"Even the big 12 insolvency resolutions taken up could not all be completed because of the legal challenges. This is why foreign funds are willing to come in only as smaller stakeholders in assured solvency processes and would be hesitant to touch even the smaller assets as part of an AIF," said Raman Chaha, senior partner with BR and Sons, one of Delhi's oldest chartered accountant firms, which also represents foreign funds.

The other problem is valuations.

"We have sounded out private sector lenders, global funds etc. They are willing to take the bite only if the valuations are really knocked down," said officials.

Banks want valuations to be around 40 per cent of the debt, which means they expect Rs 1.24 lakh crore back on their books as income after a hair-cut of 60 per cent.

Typically, global players want this haircut to be 75-80 per cent and wish to make a profit of 15 per cent on investment.

"No PSU banker, even when he is washing off his hands from a toxic asset, can take this kind of a haircut and not be accused of wrongdoing. If the new AIF takes such a decision, they risk being accused collectively at a later date," said Bannerjee.

Besides the problem of finding money to take the bad loans off the shoulders of PSU banks, the issue of moral hazard remains, cautions the North Block top brass.

"Once these banks have written off their bad loans, they start with a clean slate. But will they as bankers and we as custodians on behalf of the owners - the people of India - have learnt the lessons of this toxic spillover? Will the proclivity to give loans to bad projects submitted by the rich and powerful go away once we have done and dusted with this lot?" asked officials.