To address the twin balance sheet (TBS) problem –overleveraged companies and NPA-encumbered public sector banks – finance ministry’s economists on Tuesday floated an idea to redeploy the central bank’s capital, say about Rs 4 lakh crore, as well as the one-off gains from demonetisation to set up a public sector asset reconstruction company and to recapitalise PSBs.
Taking forward the idea, which was first advocated by the ministry’s economists in FY16 Economic Survey, their Survey for FY17 said: “Perhaps it is time to consider a different approach – a centralised Public Sector Asset Rehabilitation Agency (PARA) that could take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt.”
For some time, India has been trying to solve its TBS using a decentralised approach, under which banks have been put in charge of the restructuring decisions. But decisive resolutions of the loans, concentrated in the large companies, have eluded successive attempts at reform. The problem has consequently continued to fester: NPAs keep growing, while credit and investment keep falling.
The gross NPAs of the PSBs has shot up from Rs 2.77 lakh crore in September 2015 to Rs 5.59 lakh crore at end-June 2016 after RBI’s asset quality review guidelines made provisioning mandatory for certain assets.
Weak debt servicing capacity of many large corporates pushed the stressed assets (gross NPA and restructured loans) of public sector banks rose from Rs 7.46 lakh crore (14.62% of gross advances) as on March 2016 to Rs 7.83 lakh crore (15.74%) as on June 2016.
As a consequence, lending growth to corporates, seen critical to revive private investment, has turned negative in the last two years.
Private asset reconstruction companies (ARCs) haven’t proved any more successful than banks in resolving bad debts. But international experience shows that a professionally-run central agency with government backing – while not without its own difficulties – can overcome the difficulties that have impeded progress, the Survey said, advocating for a PARA.
Acknowledging that capital requirement would be huge to fund a PARA, it suggested that: “The RBI would (in effect) transfer some of the government securities it is currently holding to PSBs and PARA. As a result, the RBI’s capital would decrease, while that of the banks and PARA would increase. There would be no implications for monetary policy, since no new money would be created.”
Citing international precedents such as US Federal Reserve, the Survey noted that if the central bank transfers Rs 4 lakh crore out of its capital (FY16 RBI balance sheet shows Rs 8.8 lakh crore in internal reserves and unrealised gains due to periodic revaluation of gold and foreign currency assets).
Its analysis showed that RBI is one of the heavily capitalised central banks in the world.