Four years ago, the Economic Survey mentioned the need to create the Agency for the Rehabilitation of Public Sector Assets (PARA) to solve the double balance sheet problem of over-indebted companies and banks burdened with bad loans.
Since then, the concept of bad bank has been raised in various ways. The most recent is the budget announcement of the creation of an Asset Reconstruction Company (ARC) and Asset Management Company (AMC) model to address the expected spike in post-COVID-19 non-performing assets (NPAs), such as reported in the Financial Stability Report, January 2021 by the Reserve Bank of India (RBI). The concern expressed by the RBI is realistic and the government’s intention is to be commended for considering a framework to manage it. So far, so good. But let’s look at some finer details.
Read also: Why the “Bad Bank” is a bad idea for India
First of all, let’s understand the problem. The NPA is not a stand-alone problem. It is two-dimensional. This is both a stock at one point in time, which we express as gross NPAs that monopolize 100% of the spotlight, and the other dimension is flow or accretion. New NPAs are created every year.
In any NPA table, the addition of NPA is on the top row and the raw NPAs are on the bottom row (see table below).
Headline Gross NPA is around Rs 9 lakh crore as of March 2020 and everyone is rightfully bothered. But does anyone look at the number and see that the addition over the past three years is a huge crore of Rs 13 lakh and the actual reduction (excluding write-off) is less than Rs 5 lakh crore only.
The problem is not therefore to manage the pending APMs alone. How to reduce the accumulation of fresh NPAs and improve the actual reduction of NPAs should be of concern to policymakers just as much, if not more. Hopefully, the creation of a new development finance institution (DFI) will help commercial banks move away from infra finance, one of the potential areas for generating NPAs due to the mismatch of ALM and NPAs. different loan settings.
The new Good Bank is a necessary addition to the Bad Bank. The issues of improving credit underwriting skills, real-time online monitoring of end-use of funds between lenders, and resolving inter-creditor issues, etc., need to be addressed to discussion.
Now on the current ARC, the AMC build part. No details are available in the public domain, with the exception of certain statements by Union Finance Minister Nirmala Sitharaman in her budget speech and appearing in some press meetings. It would be a good idea to bring the concept together in the public domain and solicit comments from all stakeholders. Existing CRAs should be part of the consultative process around construction, because the man who wears the shoes knows where it pinches.
The bad bank has worked in some countries with active government participation. However, one thing is different, they had no ARC type structure in India operating for almost two decades now. Unless the number 29 itself has miraculous power, it will meet the same fate as the existing 28 ARCs.
Okay, that would be a mega-business and would have a big advantage in aggregating debt faster, which is the first step in resolution.
But at the end of the day, he has to resolve the assets. The doors of entry are wide open with the active support of the government, but what about the exit? The resolution framework remains the same. When four out of five cases referred to IBC head for liquidation with an average recovery of 5% in liquidation cases and 4% in DRT recovery, according to the latest RBI data, it’s time to do some soul searching.
Why is there a lack of investor / buyer appetite? This is the key question and the challenge. The infrastructure around IBCs and DRTs must be strengthened for optimal results. Just getting a mega NPA corporation to procure NPAs from banks at a remunerative price can only be a pain reliever, not the cure.
The proposed two-tier ARC and AMC framework, apparently created with the public structure and the private sector in mind for the respective entities, may create more problems than they serve. While one acquires at a price, the other must find a buyer at a price and be commercially viable. If there is no buyer at the price, each will look at the other in panic. The male will not have a stop.
Everywhere a bad bank has been successful it is because fresh money has come in. The new money will only come when there is a hassle-free acquisition, and the valuation offers the investor an attractive return to put his capital at risk. A favorable framework with the right mix of incentives and opportunities for growth is a necessary condition.
A great initiative has been taken by the government. Anyone driving the process should see that the structure is optimally designed, supports the ecosystem, and is developed for value maximization. The conditions are ripe. India is on the cusp of a new growth story. A vibrant and struggling debt market will revitalize the economy.
(The author is associated with the ARC sector. Opinions are personal.)