In a bid to deal with the mounting bad debts with no resolution in place, the government is now mulling over some radical measures. The government has not yet specified what it is planning, but these so-called 'radical' measures can be out any day.
Various existing debt resolution tools such as corporate debt restructuring (CDR), strategic debt restructuring (SDR), scheme for sustainable structuring of stressed assets (S4A) and even sale to asset reconstruction companies (ARCs) are getting stuck on the issue of haircut or one-time settlement, which means banks have to forgo a part of their claims.
Although banks are keen on one-time settlements in some cases, the fear of inquiry by government agencies is holding them back. The recent arrest of Yogesh Agarwal, former Chairman and Managing Director of IDBI Bank, in connection with the Kingfisher loan default case has further put a lid on resolutions by way of haircut or one-time settlement.
Here goes a list of 'radical' measures that are on the table for speedy resolution of bad debts:
Focussing on large stressed assets
There are a few large stressed assets, in sectors such as steel, power and infrastructure, that are included in the Rs 7 lakh crore bad loan portfolio. These assets need special attention from the government, both in terms of a go-ahead to banks for haircuts and also for policy clearance or guidance. For instance, the power sector is struggling mainly because power prices have come down and the state electricity boards (SEBs) are not signing long-term power purchase agreements (PPA). As of now, the SEBs prefer buying power through power exchanges. The government should step in to guide the states in signing PPAs, which will help them in the long run or when the prices move up. On the other hand, this will help the troubled power companies.
Overhauling joint lenders' forum
There is a joint lenders' forum (JLF) for banks to sit together and find a solution to deal with a stressed asset. The JLF is mandatory for a loan size over Rs 100 crore. But it often takes time to set up as a minimum of 75 per cent lenders (in value term) have to agree to come on a common platform. Then there are issues like banks sending lower-level officials to attend such meetings, which can delay decision-making as these members have to take board approvals. There is a strong case for lowering the threshold or beef up the JLF with participation from the senior management for faster action.
Setting up more oversight committees
Currently, there is a provision for a three-member oversight committee, comprising eminent outside professionals, for restructuring under S4A, where the unsustainable portion of a bank loan is converted into equity instruments. As a result, banks take equity and the promoters' loan burden lessens. This outside committee provides a huge relief to bankers as there is no fear of future enquiries by government agencies. Banks now demand setting up such a committee for taking decisions in other resolution schemes.
Auctioning or handing over bad loans to PSUs
There is also a proposal that calls for handing over large steel or power entities to state-owned companies. There are large public sector undertakings (PSUs) with robust balance sheets that can take over troubled private sector assets. This will not only lessen the banks' burden, but will also protect the large assets, which are very important for nation building.
Setting up a bad bank
The proposal to set up a bad bank has come from the government itself in its economic survey 2016-17. Chief economic advisor Arvind Subramanian suggested a bad bank in the form of a public sector asset rehabilitation agency (PARA). But there is a funding issue here as it has to come from the Union Budget or the banks concerned or the Reserve Bank of India (RBI) or the market.
Setting up private asset reconstruction companies
RBI Deputy Governor Viral Acharya has recently suggested a twin plan for setting up a private asset management company (PAMC) and a quasi-bad bank called the National Asset Management Company (NAMC). The former is best suited for assets that have economic value in the short run while the latter is for assets/sectors where the problem is not just excess capacity but also economically unviable assets.