Sunday 26 June 2022
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Can ARC Defuse Bank NPA Bomb?

[dropcap]I[/dropcap]ndia’s is that rare major economy, grown to a mere $2 trillion, already out of control in a vital aspect. It is in considerable trouble with regard to how it manages — or, in truth, fails to cope with — its delinquent major borrowers. It is an existential irony: The small debtor, petty businessman, farmer, is crushed, often committing suicide, while the big fish continue to swim lazily around.

At the nub of it all is the very real, if scandalous, phenomenon that large corporate debtors can get away scot-free, exploiting gaps and blind spots in the law. They can leave their IOUs to be redeemed, time after time, by the nation at large via its relatively small pyramid of taxpayers. And this, without needing to break a sweat, run away, abscond, or even give up their companies, jobs, houses, expense accounts, cars, boats, planes, and gargantuan lifestyles! The corporate honchos can preen and prance, cock a snook both at their creditors and the law, and shake their tail feathers right in everyone’s faces.

Recent reports say that the PSU banks are owed Rs. 7.32 lakh crore by just 10 leading companies, of which private estimates suggest 17.5% to 25% of the outstanding could turn into irrecoverable bad debt. The very earnest RBI governor RaghuramRajan, keen on strengthening the banking system, has been trying to clean it up by at least getting the banks to declare their true levels of NPA, and make realistic provisions.

This, even as he has been pointing out that those who have taken the decisions that have encumbered their companies and the banks should be held legally and institutionally accountable. They shouldn’t be able to continue to run their companies on their slim promoter shareholdings if they are unable to honour their debts. But, as yet, despite the bad debt having reached such unprecedented levels, very little has changed.  Declared ‘unrecoverables’ now are at over 6% of the total, grown from half the figure, since 2013.

There are no asset reconstruction companies (ARCs) or ‘bad banks’ in the as yet, though discussions are on in the finance ministry and the NITI Aayog on what contours it/they should take. And no one quite knows how to run an ARC successfully within the challenges thrown up by our complex legal and political environment either. Rs 1.14 lakh crore has been written off the books of 29 PSU banks over the last three years, per a recent Indian Express report, the highest figure being in 2015. A lot of this must be at the RBI’s urging. An amount of Rs. 2.11 lakh crores was wiped off the books by the PSU banks between 2004 and 2015, but, of this, Rs. 1,14,182 crores was struck off between 2013-2015 alone, presumably to make room for fresh lending, a stated priority of the Modi government.

The banks insist however that the write-offs do not mean they won’t continue to try to recover the amounts, and add them back if and when they do. But this does not sound very convincing on the face of it, particularly with the pressure off. But, even if they do, at the requisite branch levels, it will tend to be a discounted proportion, with regular banks negotiating like bad banks, releasing collateral, clearing the borrower of further liability, interest, penalties etc.

In terms of trying to stimulate the business and industrial environment, with inflation contained, and despite an rate cut of 125 bps by the RBI over 2015, the PSU banks, and even the private ones, have not been able to pass on very much of it to the borrowers, nor lend big because of the high and stubborn debt position on their books.

Without the required laws and structures in place, the stressed assets are largely orphaned, truth be told, as no one can be properly held liable for them. Not the borrowers who are sitting on the debt without paying their instalments. Not the bankers who did the lending in the first place, presumably after following their due diligence procedures. And not the political edifice that may have some bearing on the debt gone bad, because of policy delays, U-turns, changes in the terms of reference of contracts, interference, etc.

PSU banks are funded by the state with taxpayers’ money and, therefore, must be debt-stripped and recapitalised the same way before any private entity would consider buying in at a fair price. This is for those banks where the government might want to dilute its stake. For the recapitalisation of our PSU banks, which are smaller than they need to be anyway, the government has now earmarked Rs 70,000 crore, with the first tranche of a modest Rs 25,000 crore, to be put in during FY 17.

And while most of the banking sector malaise is indeed in the PSU banks, there are some private ones which are also quite burdened today. Almost all the vast monies lent to entities involved in construction and infrastructure development, for example, is blocked. The PE funds are moving into those construction assets with greater potential, and the government itself is doing a fair amount to get stuck infrastructure projects unjammed, recapitalised, and moving again, particularly in the area of roads, highways, and power plants. But for those corporate entities that are too deep in the hole, and need to be restructured themselves, the possible legislative saviour that could remedy the situation, is also stuck; but hopefully for not too much longer.

The new bankruptcy bill, which would have given creditors, for once, some biting teeth, looked, for a while, as if it might have found common ground between the government and the opposition. This was in the previous Winter Session of Parliament. Both sides of the aisle seemed to be concerned about the parlous state of PSU bank finances, plagued by bad debts and NPAs, and having little residual capacity to lend money.

But, it was not to be. This was followed by reportage on the bankruptcy law being presented as a money/financial bill in the Lok Sabha. It was difficult to see how this could be done because ostensibly it did not fit in with the provisions of Article 110 of the Constitution’s clauses (a) to (f) that regulate the definition of money bills. Of course, the Speaker has the authority to designate a piece of legislation as a financial or money bill, but she must have some logical premise to do so. Still, making it a money bill must have seemed like an attractive way out to the government, because the Rajya Sabha, where it does not have the numbers, cannot block a financial or money bill that has been duly introduced in the Lok Sabha, and passed by it. The can’t even hold it up beyond 14 days. Eventually, though, the bankruptcy bill got postponed for consideration, hopefully during the coming Budget Session, due to commence on 23 February.

Meanwhile, the bad debts keep mounting, and the economic turnaround is nowhere in sight, despite a 7.6% GDP growth projected for FY 16. And with our domestic corporates flouting their debt commitments, it’s no wonder that foreign investors also try and evade Indian taxes, even if they don’t dare renege on their overseas borrowings.

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Gautam Mukherjee
Gautam Mukherjee
Commentator on political and economic affairs

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