RBI and the banks have been ap­ply­ing ban­dages on the bad loans for years with no so­lu­tion in sight. It may be time to draw the scalpel if the econ­omy has to get back on its feet, writes San­gita Me­hta

The Economic Times - - Money & Banking -

to­tal bad loans at book value over 201415 and 2015-16. The struc­ture of ARCs was such that they did not have enough cap­i­tal to buy as­sets. They paid 5% of value of the as­set and is­sued se­cu­rity re­ceipts for the re­main­ing. Once they re­cov­ered, they paid the banks af­ter de­duct­ing fee.

That has been since in­creased to 15% now, and it would rise fur­ther to 50% in April 2017 and 90% from 2018.

“ARC is cap­i­tal in­ten­sive now,” says Siby Antony, chief ex­ec­u­tive at Edel­weiss ARC. “ARCs will have to have large funds at their dis­posal for be­ing rel­e­vant in the cur­rent sce­nario.” Deputy Gov­er­nor, RBI Chair­man, SBI

Piece­meal so­lu­tions are not enough given the frag­ile fi­nan­cial po­si­tions of both the banks and the com­pa­nies that owe them money. Es­ti­mates show that the un­recog­nised debts are around 4% of gross loans and per­haps 5% at pub­lic sec­tor banks. In that case, to­tal stressed as­sets would amount to about 16.6% of banking sys­tem loans – and nearly 20% of loans at the state banks, says the Sur­vey. “The ARCs can sup­ple­ment banks’ ef­forts to re­solve the bad debt prob­lem to a rea­son­able ex­tent,” says VP Shetty, ex­ec­u­tive chair­man at JM Fi­nan­cial ARC.

“Cer­tain com­pli­cated cases, by which I mean those dis­tressed loans with large out­stand­ing debt, can­not be re­solved by do­mes­tic ARC play­ers. Even if all ARCs joined to­gether, they will not be in a po­si­tion to take over such large loans be­cause of their low cap­i­tal po­si­tion.”

Stressed as­sets are con­cen­trated in a re­mark­ably few bor­row­ers, with a mere 50 com­pa­nies ac­count­ing for 71% of the debt owed by com­pa­nies with in­ter­est coverage ra­tio of less than 1. On an av­er­age, these 50 com­pa­nies owe ₹ 20,000 crore in debt, with 10 com­pa­nies ow­ing more than ₹ 40,000 crore each.

The state of af­fairs also blows the myth that In­dia was not af­fected by the global fi­nan­cial cri­sis and the banking sys­tem was re­silient. But there lies the prob­lem. In most coun­tries, lenders would have trig­gered bank­rupt­cies and taken a hair­cut, thrown out the pro­moter and brought in a new eq­uity in­vestor.

But In­dian lenders, at the be­hest of the gov­ern­ment, threw in more good money. The be­lief was that time would heal the cor­po­rate wound, but banks are bleed­ing more be­cause of that ap­proach. A lack of co-or­di­na­tion be­tween banks, or bor­row­ers play­ing one bank against an­other has been a ma­jor source of ir­ri­tant for big lenders. There is also no in­cen­tive for any­one to take the lead and ini­ti­ate quick re­cov­ery.

“It could solve the co­or­di­na­tion prob­lem, since debts would be cen­tralised in one agency; it could be set up with proper in­cen­tives by giv­ing it an ex­plicit man­date to max­imise re­cov­er­ies within a de­fined time pe­riod; and it would sep­a­rate the loan res­o­lu­tion process from con­cerns about bank cap­i­tal,” says CEA Subra­ma­nian. Bad bank as a con­cept might have worked else­where and even in In­dia it might work. The key is­sue is fund­ing re­quire­ment.

“Even in re­spect of a bad bank, what you do need is cap­i­tal and with­out cap­i­tal it may not work,” says Bhat­tacharya of State Bank of In­dia. “To that ex­tent, this is a de­ci­sion that the gov­ern­ment needs to take.”

While the gov­ern­ment is silent on the pro­posal with­out com­mit­ting ei­ther way, Subra­ma­nian has sug­gested many ways of cap­i­tal­is­ing it, in­clud­ing us­ing the re­serves avail­able with the RBI with­out any mon­e­tary im­pact. There may be pri­vate money to fund the bad bank too, if there is com­fort that it would get the power to get all the dis­parate banks to come to­gether and be­gin the re­cov­ery process with­out pulling in dif­fer­ent di­rec­tions.

While pri­vate lenders are able to do a bet­ter job by tak­ing a write­down on as­set value, state-run lenders are hob­bled by the fear of in­ves­tiga­tive agen­cies com­ing af­ter them for de­ci­sions that go wrong for fac­tors be­yond their con­trol.

“In to­day’s cli­mate, no banker would want to take any re­spon­si­bil­ity for debt for­give­ness and, there­fore, I pro­pose set­ting up of an over­sight com­mit­tee where loans above a cer­tain amount can be taken up for hair­cut,” says TT Ram Mo­han, pro­fes­sor of fi­nance at In­dian In­sti­tute of Man­age­ment, Ahmed­abad. “Many of these as­sets have eco­nomic value and they have po­ten­tial for cash flows and they would be vi­able if there is a write­off. This body should be cre­ated by an Act of Par­lia­ment.”

The reg­u­la­tor, banks and the gov­ern­ment have tried al­most ev­ery avail­able trick in the text­book to solve this prob­lem, but with lit­tle suc­cess. It may be time to try the last weapon avail­able - PARA, the bad bank, pro­vided there is a for­mula to price bad loans in a fair man­ner. “Hard choices are easy to make when you re­ally don’t have a choice,” said Neel Kashkari, the In­dian-Amer­i­can who ran TARP for the US Trea­sury. “When the con­se­quences of in­ac­tion are so grave, we have to step in.”

Is there a les­son for the In­dian gov­ern­ment?

I don’t think that a bad bank by it­self will nec­es­sar­ily work, it has to be de­signed right. The big piece of the prob­lem is get­ting banks to sell as­sets at a right price to ARCs and pri­vate in­vestors who want to come in. How to get that right price to come in -by us­ing a port­fo­lio or a bad bank kind of a ap­proach? I think that is go­ing to be the key. We are go­ing to think about what kind of de­sign is­sues might help with that, but it is some­thing if you de­sign prop­erly could help.

ACHARYA Any­thing that will help to put these stressed ac­counts into be­com­ing stan­dard would be wel­come. Now, whether this is the best so­lu­tion or oth­er­wise is dif­fi­cult for us to say, be­cause even in re­spect of a bad bank, what you do need is cap­i­tal and with­out cap­i­tal it may not work.

BHAT­TACHARYA

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