Survey proposes asset reconstruction agency to deal with NPAs

To address the festering Twin Balance Sheet (TBS) problem, the Economic Survey today suggested creation of state-owned asset reconstruction company, Public Sector Asset Rehabilitation Agency (PARA).
TBS is taking a heavy toll on the health of public sector banks, the Survey presented in Parliament said.
At least 13 of these banks accounting for approximately 40 per cent of total loans are severely stressed, with over 20 per cent of their outstanding loans classified as restructured or non-performing assets (NPAs), it said.
With such a large fraction of their portfolios impaired, it has become extremely difficult for them to earn enough income on their assets to cover their running and deposit costs, it said.

"Balance sheets of corporates and the balance sheets of banks are still a challenge. We do see evidence of that. You can see the NPAs as percentage of loans are high and rising in the public sector banks," Chief Economic Adviser Arvind Subramanian said.
One possible strategy would be to create a PARA charged with working out the largest and most complex cases loan resolution, it said.

The delay in loan resolution has put tax payers on the hooks, he said, adding NPA is mounting.
Explaining the rationale for PARA, he said the records of the private asset reconstruction companies are very patchy and therefore there is a need for an agency which will take care of both private sector corporates and public sector.

It could solve the coordination problem, since debts would be centralised in one agency; it could be set up with proper incentives by giving it an explicit mandate to maximise recoveries within a defined time period; and it would separate the loan resolution process from concerns about bank capital, the Survey said.
PARA is not just about banks, it is a lot about companies,
the Survey said.
So far, public discussion of the bad loan problem has focused on bank capital, as if the main obstacle to resolving TBS was finding the funds needed by the public sector banks, it said.

"Without doubt, there are cases where debt repayment problems have been caused by diversion of funds. But the vast bulk of the problem has been caused by unexpected changes in the economic environment: timetables, exchange rates, and growth rate assumptions going wrong," it said.
Noting that many of these companies are unviable at current levels of debt requiring debt write-downs in many cases, it said, cash flows in the large stressed companies have been deteriorating over the past few years, to the point where debt reductions of more than 50 per cent will often be needed to restore viability.
The only alternative would be to convert debt to equity, take over the companies, and then sell them at a loss, it said.

It also emphasised that banks are finding it difficult to resolve these cases, despite a proliferation of schemes to help them.
Among other issues, they face severe coordination problems, since large debtors have many creditors, with different interests, it said.
"If PSU banks grant large debt reductions, this could attract the attention of the investigative agencies. But taking over large companies will be politically difficult, as well," it said.
Observing delay in NPA resolution is costly for the economy, it said, impaired loans of banks are scaling back their credit, while stressed companies are cutting their investments.
"Private Asset Reconstruction Companies (ARCs) haven't proved any more successful than banks in resolving bad debts. But international experience shows that a professionally run central agency with government backing - while not without its own difficulties -- can overcome the difficulties that have impeded progress," it said.

Over the past three years the RBI has implemented a number of schemes to facilitate resolution of the stressed asset problem. These include Sustainable Structuring of Stressed Assets (S4A), Strategic Debt Restructuring (SDR) and Asset Quality Review (AQR).