1. NPA turnaround needs PE involvement

NPA turnaround needs PE involvement

Private equity funds could provide the financial and intellectual capital that NPAs need

Published: February 5, 2015 3:26 AM

In India, PSBs have been significant and, as of now, 27 PSBs account for a substantial part of the country’s banking operations. The total volume of stressed assets, including both gross NPAs and restructured assets for the banking sector, according to a recent PricewaterhouseCoopers-Assocham Report, are about 10.2% of the total bank lending. These figures, however, underestimate the extent of the problem, since the percentage of stressed assets is far higher for PSBs. In absolute terms, the total gross NPAs of PSBs stood at over R2.43 lakh crore at the end of September 2014.

Of these NPAs, the top 30 accounts make for R87,368 crore, or almost 36 %, of the total gross NPAs of PSBs. A sector-wise analysis of stressed assets as at the end of FY13, according to the report mentioned above, indicates that the percentage of stressed assets is worst for the aviation sector, being a whopping 27% of lending to that sector; textiles come next at 23%; power is 19.4%; the infrastructure sector comes next with 17.4%; telecom with 15.6%; iron & steel with 15%; mining with 19%; and real estate with 2%.

The analysis of NPAs is relevant, because of their significance for the profitability of banks. The failure to deal with NPAs in a timely fashion can impair the future lending capabilities of banks and even threaten their survival.

What can be done? The transfer of NPAs to asset reconstruction companies is an inadequate solution because while it helps in cleaning up the balance sheets of banks, it does nothing to improve the performance of sick and ailing units, and thereby the level of overall economic activity.
Injection of fresh capital into the banking system through budgetary support, as is currently being done, can ensure adherence to Basel norms, but still leaves the issue of NPAs unresolved.

There is one possibility of handling NPAs in a constructive manner which requires further study and examination and, subsequently, an effort at implementation.

Private equity fund-raising has gained momentum globally in recent years, with increasing amounts of capital raised each year. These funds try to identify sectors and industries to invest in where turnarounds are possible, utilising skilled management, greater organisational efficiency, financial engineering, and other tools to improve the overall health of the firms that they identify and invest in. Having made a turnaround, the private equity firm makes an exit, to then go on to explore the next profitable opportunity.

NPAs and bad loans in banks and financial institutions arise primarily because of failure of promoters, alongside inefficiencies of organisation, lack of technological capabilities and knowledge. Sometimes, promoters, having made their pie at early stages of the investment, lose interest in existing investments and embark on new ventures. Since India lacks an effective mechanism for declaration of bankruptcy, and start of Chapter 11 proceedings to recover debtors’ debts, sick units, which reflect as NPAs on the balance sheets of banks, proliferate, till bought by asset reconstruction companies.

While, at a perfunctory level, one may wonder why a private equity fund, which is looking at profit making, and commercially viable opportunities would look at sick and NPAs, deeper reflection would confirm that this is clearly a win-win situation. Private equity funds are constantly on the lookout for profitable opportunities for investments and “turnarounds”. NPAs need intellectual capital to turn them around.

There seems to be an interesting possibility to explore whether private equity firms would like to consider coming in as “thinking and financial partners”, providing the intellectual and financial capital, necessary for converting NPAs into performing and profitable units, and simultaneously reviving and revitalising the investments in these sectors. Application of new equity funding, restructuring and financial engineering, efficient management and rationalisation, sale and divestiture of unhealthy segments, are a few of the tools which can enable what was hitherto loss-making to become a profitable business opportunity.

By Sumati Mehta
The author is a former IAS officer

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