Don’t allow promoters with NPAs to return

Jagdish Rattanani and R K Pattnaik

One of the bigger challenges facing the nation today is the rising tide of non-performing assets (NPAs) which are of the order of Rupees eight lakh crore (higher by some estimates) and mostly with our public-sector banks. No bank, indeed no economy, can run with this monstrous size of bad loans, which feed on themselves and quickly grow unless drastic measures are taken. The Insolvency and Bankruptcy Code (IBC), 2016, was designed as one such measure and an important amendment to it (announced on Nov.23, 2017) has now set the stage for what will be a difficult and painful clean up.

The amendment is as plain as it is critical: it prohibits any person, including the promoters from participating in any plan to revive a business if the person is a willful defaulter or if the said person’s account has been declared a non-performing asset (NPA) for a year or more and the dues are not paid. This is simple logic, a welcome step that tells those who have not been able to run their businesses to get out of the way, whether it is seen as punishment or prudence, so that the business itself can revive.

However, this common sense is being turned on its head with the argument currently in fashion in some quarters that the promoters, even if they are currently listed as defaulters, must not be excluded from the process because they best understand the business, have invested their sweat equity and therefore have a greater stake in bringing it back on its feet. In the process, this can raise the sell-off bids, and so makes financial sense, it is sought to be argued.

Nothing could be farther from the truth. Getting in a defaulter to take on more risk leads to overborrowing by the promoter and encourages further default risks. Prohibiting the defaulters, on the other hand, puts an end to what is a vicious culture and sends an important signal to everyone in the system. Any other course would mean that promoters are in effect negotiating haircuts to get back on the saddle and restart the very cycle that is sought to be brought to an end by the insolvency process. If allowed, what we will see is the defaulting promoter of today in effect being rewarded to become the “clean” owner of tomorrow while banks count their losses – which will be a rather odd approach to cleaning up NPAs. This is a sure shot invitation to disaster and the government will be well advised not to bow to this kind of pressure.

It will not be out of place to mention that the perception that the presence of promoters as bidders under the IBC will result in better price discovery is erroneous. It is true that the market for stressed assets under these special conditions is untested. However, if a good enough price is not discovered minus the defaulting promoter, there is no reason why the promoter being in the fray can change this in any significant manner. The promoter, and a defaulter to boot, will only seek to benefit from the illliquid nature of the asset and market conditions. Moreover, such a promoter will bid in the role of a financer and is not in the business to pay a paisa more than the price that the market might be willing to offer. Reports suggest that PE firms are gearing up for the auctions and have raised distressed asset funds and have the potential to handle the bad assets in the banking system. We must see how this proceeds.

It is true that not all NPAs are a result of poor management and not all promoters are crooks siphoning away public funds. But it is equally true that the humongous size of the NPAs taken in totality is the result of excesses that raise a host of questions. Shying away from these questions is not the way in which the mess can be resolved. Any look at individual accounts itself raises many suspicions, which only add to the well-known concerns on how project costs are inflated in the Indian system, how some bankers are hand-in-glove with the crooked and how the journey of a loan gone bad often begins right at the beginning, when the loan is evaluated.

This is a vicious cycle and it will not end till an example is made out of those who have brought us to this pass. The amounts in question are more than all the corruption scandals put together, the very issues that caused the loss of faith in the Manmohan Singh government. This is the germ, the root and the fountainhead of corruption. In sorting out a crisis of this order, a few first principles should be clear and the one that says a promoter with NPAs is barred is not only desirable but an imperative for the message to sink in. But the message should not stop there. It is equally important that every single case brought under the IBC is investigated under a fast track mode so it is clear that the nation does not take lightly the game of playing with public funds.

Let us not forget that the IBC itself (and not just the recent amendment) is an unusual measure forced by unusual circumstances. We are here because, as the RBI Deputy Governor Viral Acharya once put it: “Original promoters – who rarely put in any financing and primarily provide sweat equity – have had somewhat of a field day, facing limited dilution, if any, of their initial stakes nor much of a threat of being outright replaced.” Banks are no less to blame.

In that sense, the amendment barring the defaulting promoters from bidding is an important move in the direction of promoting integrity, transparency and a sustainable credit culture, the absence of which threatens the economic security of the nation. It can help put a stop to the long-running nexus between crooked promoters, unscrupulous bankers and all others who perpetuate that merry ride.

Rattanani is a journalist and Pattnaik is a former central banker. Both are faculty members at SPJIMR. Views are personal. (Syndicate: The Billion Press)

IN sorting out a crisis of this order, a few first principles should be clear and the one that says a promoter with NPAs is barred is not only desirable but an imperative for the message to sink in. It is equally important that every single case brought under the IBC is investigated under a fast track mode so it is clear that the nation does not take lightly the game of playing with public funds.