The twin balance sheet problem — over-leveraged companies and bad-loan-encumbered banks — is perhaps India’s top macroeconomic challenge at the moment.
The twin balance sheet problem — over-leveraged companies and bad-loan-encumbered banks — is perhaps India’s top macroeconomic challenge at the moment and how much of haircut the banks will have to take is at the core of the problem, chief economic adviser Arvind Subramanian said on Wednesday. “The government is acutely aware of the urgency of tackling this problem… So, as the finance minister said, we are going to be taking action on this, what exactly the timing and form (of action) will be, that we will see over the next (few) weeks,” Subramanian told CNBC-TV18 on the sidelines of Credit Suisse’s 20th Annual Investment Conference in Hong Kong. “That (how much will be the haircut and who will take it) is the heart of the problem,” he said, adding that any democratic political system finds it difficult to write down debts of the private sector. The situation in India has been aggravated by the involvement of few large private sector companies (who account for bulk of the stressed assets) and tight monitoring by the judiciary and investigation agencies.
Total stressed assets (gross non-performing assets or NPAs and restructured standard advances) of scheduled commercial banks were to the tune of R9.64 lakh crore as of December 31, minister of state for finance Santosh Kumar Gangwar told Parliament this month. Some of the options currently discussed by the government to address the bad loan crisis have already been articulated by Subramanian (such as floating a centralised Public-sector Asset Rehabilitation Agency or bad bank) or RBI deputy governor Viral Acharya (setting up of a private asset management company and a national asset management company), although it is yet to reach a decision.
“I am in favour of it (PARA) but it is an idea that the government is considering among many other options,” Subramanian said. He added that creating new institution takes time and we have to work within this constraint. He also spoke about the potential challenge posed by the four Cs — court, the Central Vigilance Commission, the Central Bureau of Investigation, and the Comptroller and Auditor General of India. He added that while some of the earlier loans made should not have been made, some of the loans have turned out to be honest mistakes.
In the Economic Survey of 2016-17, Subramanian suggested setting up PARA that would purchase stressed loans (especially the largest and most difficult ones) from banks and then work them out, either by converting debt to equity and selling the stakes in auctions or by granting debt reduction, depending on professional assessments. Later, speaking to FE, he had said PARA could be 49% government-owned (to give it the operational freedom it needs); there could be another 10-11% LIC-type of holding to give it the government character; and the rest could be private. However, the RBI’s Acharya favoured setting up of a private asset management company (PAMC) modelled as a private agency, which would seek to resolve assets with economic value in the short run. On the other hand, a national asset management company (NAMC), he said, would rope in asset managers such as asset reconstruction companies and private equity to manage and turn around the assets that appear to be unviable in the short or medium term.
Banks Board Bureau chairman Vinod Rai had said on Tuesday that if the government creates a bad bank, it would be crucial to empower and capitalise it. NPAs had reached 9% of total advances by September 2016, double their level a year earlier. Importantly, more than four-fifths of the NPAs were in the public sector banks, where the NPA ratio had touched almost 12%. Taking a sample of 39 top banks, CARE Ratings has estimated that NPAs accounted for Rs 6,97,409 crore — or 9.3% of their advances — as of December 2016.