Resolving NPAs – Understanding Asset Rehabilitation Agency..

NPAs of the banking sector, especially the public sector continue to remain high, estimated at about 12% for PSBs. While various measures have been taken to resolve the issue, none seems to have worked so far. This has led to the proposal of creating a public sector asset rehabilitation agency (PARA) by the Economic Survey, also supported by RBI. How would PARA operate and can it solve the problem. A look..

The concept of PARA is very simple. It would be a government owned and funded agency which would ‘buy’ the specified bad debt of the banks, albeit at a discounted price. So, if the debt of Rs 10,000 crore owed by company A would be sold to PARA at say, Rs 6,000 crore, bank would get rid of its large NPA. However, this is coming at a price for banks whose equity capital would come down by the amount equal to the discount given. So, if bank’s balance sheet had Rs 20,000 crore equity and Rs 200,000 crore deposits and other funds, it would become Rs 14,000 crore equity and Rs 200,000 crore other funds. This would require government to recapitalise the banks not only to meet the regulatory norms but also to keep the confidence in banking system. After the sale, bank’s asset side of balance sheet would move from NPAs of says, Rs 25,000 crore to Rs 15,000 crore, other items remaining same. With a controlled level of bad debts, banks, wary of lending currently, would step up the lending and provide momentum to the economy.
PARA would subsequently aggregate all specific bad debts and work to recover the loan. This strategy, with more focussed approach, may work. As per the Economic Survey, over 70% of the debt with interest coverage ratio of less than one is owed by top 50 companies. Top 10 heavily indebted companies owe more than Rs 40,000 each to the banking sector. However, since these loans are given by a consortium of banks, their resolution becomes not only time consuming but also almost impossible, due to coordination issues, differences in decision making approach and even fear of harassment if a bank accepts a write-off. If PARA takes over the loan of all the banks to these specific companies, it can take faster decision with more professional and technical expertise, which public sector banks may not be having. This could also include taking stake in the company by converting debt to equity which would reduce the interest obligation of the company and at least, stop it from getting deeper into ‘debt trap’. The companies should see eventual revival with economic upturn. This is somewhat similar to what US government did during global financial crisis when it infused funds into some of the companies by purchase of equity which saved the company from going bankrupt. With the improvement in economic conditions, cash flow and the health of the companies improved when the government existed the companies.
However, not all bad debt and all companies can see a revival with this approach. Some of the companies are working with unviable business model due to huge escalation in project cost. More on this, later..
(Image courtesy – The Economic Survey)

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