India’s policymakers have had their hands full dealing with the problem of bad debts in banks. And yet, for the most part, debt recovery has been, at best, iffy. The latest effort to resolve the non-performing assets (NPAs) issue and recover as much value as possible has been made by the Banks Board Bureau (BBB). Unlike the previous policy provisions that essentially sought to lay down a regulatory path and facilitate promoters of struggling companies, or the banks that were saddled with such NPAs, to sell the assets, the BBB’s proposal is aimed at arriving at a time-bound and speedy resolution of the NPA mess.
According to the proposal, submitted to the finance ministry, promoters, who have agreed to sell their assets to pay off loans and have made public announcements on the price at which the assets will be sold, will receive counter-offers from public sector companies. The “drastic” move, as a government official acknowledged, is the result of the feeling among the policymakers, both within the government and the Reserve Bank of India, that several business promoters have been delaying the sale of their assets in the hope that banks would go slow on debt recovery. Alternatively, promoters could also be buying back their own assets at reduced rates under benami accounts, while also getting a write-off on their bad debt. Be it endless delays or sub-optimal deals, the BBB has tried to find a way out of both by bringing public sector enterprises into the picture. According to the BBB, willing PSUs, without any pressure from any quarter, can make a counter offer to the promoter and the banks.
Doing so has two key benefits. One, a counter offer calls the bluff on sub-optimal deals and thus improves debt recovery. Two, it also forces the issue to come to a closure instead of an endless wait for buyers. Lack of buyers for such distressed assets is claimed to be the central limitation in resolving NPAs. That is the reason why the RBI has been forced to find newer ways to push for resolution — be it the setting up of the joint lenders forum in January 2014 or the strategic debt restructuring scheme in June 2015 or the scheme for sustainable structuring of stressed assets introduced in June this year. On the face of it, the BBB seems to be on the right track in trying to bring closure to the growing problem of NPAs in the system — gross NPAs have risen sharply from 4.3 per cent in FY14 to 7.6 per cent in FY16, and worse still, are likely to rise further to 10.1 per cent by March 2017.
However, this proposal is fraught with some risks. The first concern is whether this will ultimately result in arm-twisting of well-performing PSUs to make counter offers. In this regard, recent reports about the Life Insurance Corporation, a cash-rich state-owned enterprise, being treated almost like the lender of the last resort by the government do not inspire much confidence. If that happens, then the latest proposal could just be a throwback to the bygone era where the public sector held the so-called commanding heights of the economy — and completely in contrast both to the spirit of economic liberalisation as well as the government’s own motto of “minimum government, maximum governance”.
