Agency with muscle can fix bad loans

How bad bank will be capitalised, ask experts

A centralised Public Sector Asset Rehabilitation Agency (PARA) should be created to take charge of the largest and most difficult stressed loans.
 
The agency, suggested the Economic Survey, could be allowed to take politically tough decisions and reduce non-performing assets and restructured loans.
 
The economy has been grappling to solve its twin balance sheet (TBS) problem — overleveraged companies and bad-loan-encumbered banks — a legacy of the boom years around the global financial crisis. The Survey said “decisive resolution is urgently needed before the TBS problem becomes a serious drag on growth”.
 
Private asset reconstruction companies (ARCs) have not been successful in resolving bad debts. International experience, including that of East Asian economies, show that a professionally run central agency with the government backing could overcome issues, including political, that have impeded progress over the past eight years, the Survey pointed out.
 

Pankaj Pandey, head of research, ICICI Securities, said: “This seems like the final measure that the government is resorting to fix the issue of bad loans.”
 
Gross non-performing assets (NPAs) had climbed to almost 12 per cent of gross advances for public sector banks at the end of September 2016. At this level, India’s NPA ratio was higher than that of any other major emerging markets, with the exception of Russia.
 
Efforts by various stakeholders, including the Reserve Bank of India, to find a solution to this problem have failed. “Perhaps it is time to consider a different approach….”
 
Some debt repayment problems have been caused by diversion of funds. But the vast majority was caused by unexpected changes in the economic environment after the global financial crisis.
 
But R Sreesankar, head of research, Prabhudas Lilladher, said he was doubtful if PARA would succeed. “The question is how will PARA be capitalised and whether it will be adequate to mop up all the bad assets in the banking system. With the most critical aspect on underwriting of assets not addressed, this will only be a temporary solution for banks,” he added.
 
“Until we get the fine print on how PARA will be funded and how it would take over loans from the banks, I wouldn’t jump the gun and call this measure as a problem-fixer,” said an analyst from a foreign brokerage.