Friday, 11 August 2017

NPA's: Govt's all talk and no action

  • Infrastructure and capital-intensive industries are imperative for development but too difficult a responsibility for the private sector to shoulder because of long gestation period and low returns.
  • During financial year 2016-17, when demonetization disrupted banking activity, banking sector grew by just 1.7%, which was a 20-year low. 
  • Most of the banks involved in NPA's are public sector entities with the perception that the liabilities of these banks are backed by a sovereign guarantee, that has prevented a run on these banks.
  • The ratio of stressed assets to gross advances in the banking system has crossed the double-digit mark and few borrowers account for a large share of defaults. 
  • As banks are grappling with the defaults, they tried to retrieve themselves from this mess by lending more to potential defaulters or converting part of their debt into equity which did not work. On the other hand, the deficits on the balance sheets of these firms became even larger. When banks decide to make a case for liquidation to recover at least a part of their loans, the net assets were not even a fraction of the value of their exposure, especially since resources have often been diverted out of the firms concerned.
  • Bank NPAs are not a new issue, though the magnitude of the problem was revealed when Raghuram Rajan, the previous RBI Governor, imposed new guidelines on identifying NPAs. 
  • Given poor shape of public sector banks the price at which they could be privatized is likely to be indefensible.
  • The only way out is banks recapitalization by government and writing off NPAs and going forward diligently. Money lost once is generally irretrievable.
  • The new bankruptcy law, forces a settlement must be reached within 180 days. These 12 large defaulters account for around a quarter of NPAs and quick resolution of these NPAs even with a discount, that would reduce government's recapitalization requirements. Little is likely to be recovered from absconding individuals, like Vijay Mallya of Kingfisher Airlines. 
The reform-induced failure of the government to mobilize adequate resources, through taxation or borrowing, to finance capital expenditure is the root cause of the current bank's crisis. Private sector firms borrowed high value banks funds and invested in infrastructure and capital intensive projects with long gestation where the profits have been volatile and difficult to come by, and firms have found themselves unable to service their debts. Today almost all infra and public utility companies are in red. Restructuring of debt etc works rarely and generally postpones collapse of firms and banks. Most important problem is inflation of project costs, corruption and siphoning of funds by promoters. It is well known that promoters take back their investment, albeit illegally, even before project construction takes off.

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