Dealing with stressed business assets: Giving up on time is a smart strategy

March 8, 2021 8:33 PM

Ease of Doing Business for MSMEs: The situation of stressed assets is hardly surprising, given the economy’s stressed assets had quadrupled from $26 billion in 2015 to $106 billion in 2020. Thus far, regulators have made several attempts to mitigate the situation. None seems to have worked.

Launched on April 8, 2015, PMMY offered up to Rs 50,000 loan under the Shishu cover, Rs 50,000 – 5 lakh loan under the Kishor cover, and Rs 5 lakh – Rs 10 lakh under the Tarun cover to non-corporate, non-farm MSEs.
  • By Samir Sathe

Ease of Doing Business for MSMEs: Not giving up is a sign of resilience. It does not mean that giving up on time is a sign of failure. Indian businesses and regulators see it otherwise, perhaps, not realising that the cost of not giving up could be more expensive than giving up on time. The situation of stressed assets is hardly surprising, given the economy’s stressed assets had quadrupled from $26 billion in 2015 to $106 billion in 2020. Thus far, regulators have made several attempts to mitigate the situation. None seems to have worked. I categorise the attempts in three segments:

First is monetising the deposits, forex reserves, and shuffling the unutilised investments in Financial Institutions, Strategic Debt Restructuring (SDR), which allows trading of non-performing assets to new owners, Sustainable Structuring of Stressed Assets (S4A), tweaking of norms of CRR, SLRs, etc.

Second is government repurchasing the stressed assets or setting up Asset Reconstruction Companies (ARCs), Asset Management Companies to manage the stressed monies by recovering them, defining Insolvency and Bankruptcy Code (IBC), Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and stressed asset management verticals, etc.

Both the segments of attempts have not resulted in any material benefit to convert bad money into good. The recovery rates are around 20 per cent, and the haircuts are around 80 per cent of which liquidations make a large portion, which itself is a worrying fact. The process of transferring impaired assets has stopped as the AMCs and ARCs do not find it worthwhile to do it given the lack of clarity in the demand situation.

PSBs, while improving marginally in recovery rates, are far away from being in healthy condition on the Capital Adequacy Ratios (CARs). Private lending financial institutions are wary of large big corporates given the sleuth of frauds and scandals breaking the back of some of the financial institutions in the last three years and with the pandemic are wary of increasing exposure to small and medium-sized businesses. Finally, the government’s reserves are in the state of an impasse with either the take-off of the announced schemes is underwhelming or the regulators are worried that the only silver lining of the clouds on the economy should not turn into copper should these funds be used to rescue the stressed asset situation. In summary, the named rescuers are anxious to rescue the victims, and victims are unable to rescue themselves as their businesses are shy of confidence in growth, resulting in a deadlock.

Also read: Govt looks to outsource Bharat Craft e-commerce portal for MSMEs months after project fails to take off

The third segment is the one not thought of adequately. It is to focus all efforts in concert in a warlike mission to not rescue the businesses with a goal to stay invested but by divesting from their current businesses on time and churn the portfolio. It may seem hard, cruel, and even undemocratic, but it is necessary.

We need to flip the attention from investments to divestments, identify where we need to cut the cord fast at the systemic level for the deserving ones to survive, prosper, and scale-up. This is not bailing them out by infusing more funds. This is about rescuing the victimised businesses to be out of what has dragged them into the quagmire of debt, unprofitable ventures. Regulators should invest their resources in educating themselves and businesses to know what businesses should not do more than assuming that they should continue in their current businesses and keep searching for answers. Giving up on time, sometimes, could potentially be a better strategy than not giving up at all and perhaps the best rescue that is available for many Indian businesses.

Samir Sathe is Executive Vice President, Wadhwani Advantage at Wadhwani Foundation. Views expressed are the author’s own.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Interview | We want to double MSME loans under SIDBI’s 59-min scheme in 2021: Online PSB Loans’ Jinand Shah
2MSME exports: How fintech can catalyse cross-border transactions for small firms selling via e-commerce
3‘2.1M women at the center of India’s direct selling market have become successful entrepreneurs’