March 3, 2017

The idea of a public-sector asset reconstruction company (ARC) to tackle the bad loan crisis, as mooted by the latest Economic Survey, is unlikely to materialise in 2017-18. This is because the government intends to first monitor the performance of the existing private-sector ARCs before moving on to the next, and much more difficult, stage of weighing the political as well as financial costs of setting up such an agency.

Making a case for a centralised public-sector asset rehabilitation agency (PARA) that would purchase stressed loans (especially the largest and most difficult ones) from banks and then work them out, the Economic Survey for 2016-17 stressed that decisive resolutions of the bad loan crisis have eluded successive attempts at reform, and the twin balance sheet problem — overleveraged companies and bad-loan-encumbered banks — continues to grow.

“A decision of this importance (setting up a PARA) can’t be taken in a hurry as it will be a very bold move not just politically but even financially in a country like ours. So, it’s essential that the government first monitors the performance of existing private-sector ARCs and sees why they haven’t yet achieved the desired success,” an official source told FE. “Ideally, the processes for creating a more successful and robust ecosystem for ARCs should be set right first before considering whether to have a PARA or not,” the official added.

The Budget for 2017-18 has not made any fund provision for PARA. It has allocated just R10,000 crore for recapitalisation of public-sector banks in 2017-18, as proposed under the Indradhanush plan, compared with the R25,000 crore for the current fiscal.

The Economic Survey said non-performing assets (NPAs) reached 9% of total advances by September 2016 — double their level a year before. Importantly, more than four-fifths of the NPAs were in public-sector banks, where the NPA ratio had touched almost 12%. At its current level, India’s NPA ratio is higher than any other major emerging market, barring Russia. According to CARE Ratings, NPAs accounted for R6,97,409 crore — or 9.3% of banks’ advances — as of December 2016.

Explaining the likely role of PARA, the Survey says after purchasing the bad assets, the agency could work them out either by converting debt to equity and selling the stakes in auctions or by granting debt reduction, depending on professional assessments. Once the loans are off the books, the government would recapitalise the public-sector banks, enabling them to make new loans. Similarly, once the financial viability of the over-indebted enterprises is restored, they will be able to consider new investments.

“Of course, all of this will come at a price, namely accepting and paying for the losses. But this cost is inevitable. Loans have already been made, losses have already occurred…” it said. Stressing that the loan crisis can’t be contained in a business-as-usual manner, chief economic adviser Arvind Subramanian last month told FE: “There has to be serious political cover (for PARA) if you’re writing off 50-70% of debt.” Outlining the possible architecture of PARA, Subramanian had said it could be 49% government-owned (to give it the operational freedom it needs); there could be another 10-11% LIC-type of holding to give it the government character and the rest could be private.

Currently, ARCs, which buy stressed assets from banks and make money by recovering them, have around R60,000 crore worth of such bad loans under management, according to an industry estimate.

While recent steps like the Bankruptcy Code and 100% FDI in ARCs via automatic route could attract overseas funds to invest in the asset reconstruction space here, the segment hasn’t yet grown as it should. ARCs have bought up only about 5% of the total NPAs at book value over 2014-15 and 2015-16. The problem is that ARCs have found it difficult to recover much from the debtors, according to the Economic Survey. Thus, they have only been able to offer low prices to banks — prices which banks have found difficult to accept.

[The Financial Express]