Cutting the Gordian Knot on Bad Loans



NPA is an emotional issue for every thinking Indian. NPAs or bad loans are taking away scarce funds from investments in education and healthcare, rural development and infrastructure. It is one of the biggest hurdles in the way of creating employment opportunities in a country which is releasing young people to the labour market at an unprecedented rate.But before we look at the economic damage being wrought by NPAs, let us look at the hard facts. In mid-FY2016, the RBI had initiated a complete overhaul of the system so that banks' books reflect true nature of stress. Last December it initiated an asset quality review and asked banks to classify over 125 accounts as bad.

While asking banks to come clean by March 2017, the then governor Rajan had said that "deep surgery" was a must for the clean-up and the process of recognising the NPA was akin to an "anaesthetic" needed for the procedure.

This resulted in massive provisions and historically high losses being reported by the lenders that led to many going slow on new credit growth and in turn hitting the economy.

Total stressed loans, including gross NPAs and restructured assets stood at over 12 per cent as of end June or over Rs 8 trillion, with NPAs alone at 8.7 per cent.

State-run banks, which control over 70 per cent of the system, have reported higher stress.

In a base case scenario, in financial stability report, the RBI had said it expected NPAs to rise further this yeaIn the middle of fiscal 2016, the then Governor of Reserve Bank of India Dr. Rajan, initiated a complete exercise to understand the extent of the problem.Dr. Rajan recommended a deep surgery. He called the process of recognizing the bad loans as an anaesthetic needed for the surgical operation. Total stressed loans, including gross NPAs and restructured assets stood over 12 % at the end of June 2016, with NPAs alone at 8.7%. What is most distressing: the public sector banks i.e. tax-payers and citizens will bear the real brunt as they are 70% of the system and have a disproportionate share of these stressed loans. Another piece of fact: The total debt of the top 500 corporate borrowers now is Rs 28.1 trillion. The banks need Rs.2.09 trillion for capital infusion.

Did this crisis happen overnight? Of course not, it has been building up for a decade. It was the RBI which brought the skeletons tumbling out of the cupboards of banks. In the base case scenario, the NPA situation will become worse this fiscal year. The additional capital buffer required for Basel III is an additional excuse for public sector banks to clamour for government money to shore up their balance sheets.

What is happening? Analysis after analysis has indicated that the biggest defaulters of loans are the biggest businesses. By not repaying the loans, they are damaging the Balance Sheets of our banks. The tax-payers are then being called upon to bring in trillions of Rupees of new capital to strengthen our public sector banks. In effect, the people of this country are financing the defaulting large businesses without having a say or a stake or an upside in these businesses and banks are acting as mere conduits.

Everyone agrees, including our Finance Minister, that this state of affairs cannot continue but we have no consensus on what is to be done.

 
Vijay Mallya is not an isolated phenomenon. There are many more like him who have not returned billions to public sector banks and have joined the ranks of the Healthy Owner Sick Enterprise (HOSE) billionaire club. Of course, the law must take its course and, if there is criminal siphoning of funds or money-laundering, the errant industrialist must be hit with the full force of law. But putting Mallya behind bars alone will not bring back Kingfisher Airlines to life.

For the purpose of political grand-standing it is easier to prosecute a Vijay Mallya but it is far more difficult to revive “sick” companies or make a “stressed asset” healthy. We have to focus on the revival of sick-enterprises and to do that we have to remove inept and dishonest owners like Mallya at an early stage from management. No purpose is served by closing the barn doors after the horses have bolted.

The key to the solution of the NPA problem is to take out the crony capitalists from the ownership and management of sick and stressed companies before they cause irretrievable damages. The unholy alliance of politicians, bankers and crony capitalists have ensured that sick companies are on a perpetual life-support and the owner/manager continues to siphon funds that are replenished by banks and the loans are serially restructured. There is a whole ecology of dishonest lawyers, investment bankers and public accountants who have created this lovely oxygen tent for the HOSE entrepreneurs in India.

The Government and the Banks will have to vigorously pursue bankruptcy proceedings against delinquent loan-takers. The fear of bankruptcy under the new laws will be a big deterrent to those who customarily skate on thin ice. One of the main reasons why NPAs build up is this: the same owners remain in management although the companies keep defaulting and borrowing more and more.

When the German unification took place, the German Government formed the Treuhandanstalt (a Trust) to do a massive turnaround of the stressed companies in East Germany. It oversaw the successful restructuring and selling of about 8500 companies. One of the principal strategies was to hand-over sick enterprises to successfully managed companies. India needs a massive program like the Treuhandanstalt which will begin with exiting existing owners and handing over the management to successfully run groups. This is not rocket science. When the Satyam scam hit the fan, the government assembled professionals of exceptional caliber and integrity to stabilize the operations and then divested it to a strong company. The rest, as they say, is history. 

On a war footing, we have to create turnaround agencies as well.Perhaps in joint venture with international private equity players and turnaround agencies, India should embark upon a revival strategy by offering stressed companies to new investors who bring in capital, technology, market access , management and good governance.

Global private equity players have in-house consulting and restructuring capabilities that they routinely use to turnaround companies and create value. To solve the NPA problem, we should focus on turning around the stressed and sick companies. NPAs constitute a clear and present danger that can derail India’s economic growth. The solution is to craft a successful revival strategy for sick and stressed companies. But the key is to cut the Gordian knot: throw dishonest owners out of management.

 


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