Shaking A Tail Feather
India’s is that rare major economy, grown to a mere $ 2
trillion, already out of control in a vital aspect. It is in considerable trouble
with regard to how it manages, or in truth, fails to cope with, its delinquent
major borrowers.
It is an existential irony, the small debtor, petty
businessman, farmer, is crushed, often committing suicide, while the big fish
continue to swim lazily around.
At the nub of it all is the very real, if scandalous
phenomenon, that large corporate debtors can get away scot-free, exploiting
gaps and blind spots in the law. They can leave their IOUs to be redeemed, time
after time, by the nation at large, via its relatively small pyramid of
taxpayers.
And this, without needing to break a sweat, run away,
abscond, or even give up their companies, jobs, houses, expense accounts, cars,
boats, planes, and gargantuan lifestyles. The corporate honchos can preen and
prance, cock-a-snook both at their creditors, and the law, and shake their tail
feathers right in everyone’s faces!
Recent reports say that the PSU banks are owed Rs. 7.32
lakh crores by just 10 leading companies, of which, private estimates suggest
17.5% to 25% of the outstanding could turn into irrecoverable bad debt.
The very earnest RBI governor Raghuram Rajan, keen on strengthening
the banking system, has been trying to clean up, by at least getting the banks
to declare their true levels of NPA, and make realistic provisions.
This, even as he has been pointing out, that those who
have taken the decisions that have encumbered their companies and the banks,
should be held legally and institutionally accountable. They shouldn’t be able
to continue to run their companies on their slim promoter shareholdings if they
are unable to honour their debts.
But as yet, despite the bad debt having reached such
unprecedented levels, very little has changed. Declared unrecoverables now are at over 6% of the
total, grown from half the figure, since 2013.
There are no asset
reconstruction companies (ARCs), or ‘bad banks’ in the country as yet, though
discussions are on in the finance ministry and the Niti Aayog on what contours
it/they should take. And no one quite knows how to run an ARC successfully within
the challenges thrown up by our complex legal and political environment either.
Rs. 1.14 lakh crores has been written off the books of 29
PSU banks over the last three years, per a recent Indian Express report,
the highest figure being in 2015. A lot of this must be at the RBI’s urging.
An amount of Rs. 2.11 lakh crores was wiped off the books
by the PSU banks between 2004 and 2015, but of this, Rs. 1,14,182 crores was struck
off between 2013-2015 alone, presumably to make room for fresh lending, a
stated priority of the Modi government.
The banks insist however, that the write-offs do not mean
they won’t continue to try to recover the amounts, and add them back if and
when they do. But this does not sound very convincing on the face of it,
particularly with the pressure off. But, even if they do, at the requisite branch levels, it will tend
to be a discounted proportion, with regular banks negotiating like bad banks,
releasing collateral, clearing the borrower of further liability, interest,
penalties etc.
In terms of trying to stimulate the business and
industrial environment, with inflation contained, and despite an interest rate
cut of 125 bps by the RBI over 2015, the PSU banks, and even the private ones,
have not been able to pass on very much of it to the borrowers, nor lend big
because of the high and stubborn debt position on their books.
Without the required laws and structures in place, the
stressed assets are largely orphaned, truth be told, as no one can be properly
held liable for them. Not the borrowers who are sitting on the debt without
paying their instalments. Not the bankers who did the lending in the first
place, presumably after following their due diligence procedures. And not the
political edifice that may have some bearing on the debt gone bad, because of
policy delays, u turns, changes in the terms of reference of contracts,
interference, etc.
PSU banks are funded by the state, with tax payer money,
and so must be debt-stripped and recapitalised
the same way, before any private entity would consider buying in at a fair
price. This is for those banks where the government might want to dilute its
stake.
For the recapitalisation of our PSU banks, which are smaller
than they need to be anyway, the government has now earmarked Rs. 70,000 crores,
with the first tranche of a modest Rs. 25,000 crores, to be put in during FY 17.
And while most of the banking sector malaise is indeed in
the PSU banks, there are some private ones which are also quite burdened today.
Almost all the vast monies lent to entities involved in construction and
infrastructure development, for example, is blocked.
The PE funds are moving into those construction assets
with greater potential, and the government itself is doing a fair amount to get
stuck infrastructure projects unjammed, recapitalised, and moving again,
particularly in the area of roads, highways, and power plants.
But for those corporate entities that are too deep in the
hole, and need to be restructured themselves, the possible legislative saviour
that could remedy the situation, is also stuck; but hopefully for not too much
longer.
The new bankruptcy bill, that would have given creditors,
for once, some biting teeth, looked, for a while, as if it might have found
common ground between the government and the opposition.
This was in the previous ‘winter’ session of parliament.
Both sides of the aisle seemed to be concerned about the parlous state of PSU
bank finances, plagued by bad debts and NPAs, and having little residual
capacity to lend money.
But, it was not to be. This was followed by reportage on the bankruptcy
law being presented as a money/financial bill in the Lok Sabha. It was
difficult to see how this could be done, because ostensibly it did not fit in
with the provisions of Article 110 of the Constitution, clauses (a) to (f) that
regulate the definition of money bills.
Of course, the Speaker has the authority to designate a
piece of legislation as a financial or money bill, but she must have some logical
premise to do so.
Still, making it a money bill must have seemed like an
attractive way out to the government, because the Rajya Sabha, where it does
not have the numbers, cannot block a financial or money bill that has been duly
introduced in the Lok Sabha, and passed by it. The Rajya Sabha can’t even hold it up beyond 14 days.
Eventually, though, the bankruptcy bill got postponed for
consideration, hopefully during the
coming budget session, due to commence on February 23rd.
Meanwhile the bad debts keep mounting, and the economic
turnaround is nowhere in sight, despite a 7.6% GDP growth projected for FY 16.
And with our domestic corporates flouting their debt
commitments, it’s no wonder that foreign investors also try and evade Indian
taxes, even if they don’t dare renege on their overseas borrowings.
For: SirfNews
(1,212 words)
February 9th, 2016
Gautam Mukherjee
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