Once again, there is talk of a bad bank. Arvind Panagariya, vice-chairman of NITI Aayog, believes it could be a panacea for the NPA problem. It is not clear how exactly this will work and who will pick up the tab; for instance, if the toxic assets of lenders are taken off their balance sheets and housed in a new entity, will they be allowed to retain the capital that has been set aside as provisions for these? Or will they take a hair-cut? How will the new entity be capitalised? Will taxpayers be paying for it as they have been funding Air India’s losses all these years?
Investment bankers and strategists are all for picking up the NPAs from banks and putting them elsewhere, because then the stocks can be re-rated and foreign investors will scoop them up fetching them hefty commissions. Cleaning up bank balance-sheets is no doubt critical and the government may want to make banks more eligible in the capital market, by stripping them of the NPAs, because it simply doesn’t have the resources to capitalise them.
But what this will end up doing is create a moral hazard; already most promoters in India believe it is their birthright to borrow from banks, but not their responsibility to repay the loan. To be sure, not every corporate is irresponsible, but a large number is and because the legal system is so badly skewed against lenders, defaulters get away scot free. As RBI Governor Raghuram Rajan has observed, the system has several ‘freeloaders’.
It is not just the private sector that is indebted beyond its means; perennially loss-making public sector enterprises like Air India too have leaned heavily on banks. And then there are the state electricity boards (SEBs), who despite committing to hiking tariffs in lieu of easier repayment terms under the government’s Financial Restructuring Programme (FRP), haven’t done so. Some of them are actually looking for a second round of restructuring because there is never any stigma attached to this, nor is penal action taken. Lenders are prodding some private sector companies to deleverage themselves by selling peripheral assets, but somehow there is never any talk of asking the state governments to sell their assets.
The way to make banks’ balance-sheets stronger is to retrieve the money from borrowers by pressuring them to repay the loans, whether by selling assets or some other means. Create a cell that is armed with recovery specialists and lawyers and crack down on defaulters and make sure they sell their assets—the entity could assist banks in the strategic debt restructuring (SDR) that some of them are looking to do. At a price, there are takers for assets—especially in sectors like roads and real estate. Taxpayers will happily pay for this if they are convinced errant promoters will be brought to book.
To lead by example, the government must repay banks the Rs 40,000-odd crore that Air India owes them and it must ask the state governments to do likewise for the dues of SEBs. If state governments dither, then the Centre should repay banks from the states’ share of tax revenues. Even if just the outstandings of SEBs and Air India are cleared—some R4 lakh crore—balance-sheets will become sturdier.
If policymakers are worried there isn’t going to be enough money to fund the next round of growth—which, in any case seems to be a long way off—they needn’t be. Banks today aren’t short of funds, they are short of borrowers who, they can be sure, will repay the money. As chief economic advisor Arvind Subramanian observed at an event recently, the concern today is not where to find the money but how to spend it. In the case of banks, the problem is one of who to to lend to so that the money comes back—it is one of equity, not of debt, because most promoters are not creditworthy enough to raise equity capital.
Bailouts are always a bad idea and each time the government comes up with one such ‘package’, borrowers become even more brazen. Farm-loan waivers are a favourite with governments before any election—the R60,000-crore waiver by the UPA government resulted in large losses for banks. Special dispensations, like there was for a Kingfisher, where banks were permitted to treat the asset as ‘standard’ although it was an NPA are also not desirable.
The problem is that borrowers—especially the big ones—know they are in a better state than the lenders; so, once the assets are taken off the books of banks, they will drop even the pretence of paying back. The evidence can be seen in the manner in which loans are being restructured; not only are borrowers being given more lenient terms to pay back the loans, they are getting additional lines of credit, possibly because that would help banks classify the asset ‘standard’. But even after the additional assistance, the number of turnarounds is few; since the CDR cell was set up, 65 cases, worth close to Rs 57,000 crore, have failed with the loan turning into an NPA; in FY15 alone, 44 accounts, worth Rs 27,015 crore, that were recast, failed.
While it would be unfair to paint all of them with the same brush, it is a fact that many lenders are lethargic when it comes to recovering their dues. To be fair to them, the recovery mechanisms—whether it the DRT or Sarfaesi or even the courts—are ineffective and the laws have loopholes that borrowers are only too happy to exploit. But even otherwise, not all banks have gone after defaulters the way they should have. If the NPAs are taken off their books, the urgency to recover the loans will be gone; the bad loans need to stay on the books as a constant reminder of how importance due diligence is.