Growth alone won't relieve pain, says Economic Survey

Twin balance sheet: Firms unable to service loans saw earnings fall, piling stress on banks' books

India’s “twin balance sheet” (TBS) problem - that of rising corporate stress and the resultant pile-up of bad debt on banks’ books - doesn’t show any signs of abating; this may ultimately require alternative measures, including some tough decisions to reign in the situation, said the Economic Survey 2016-17.
 
This TBS problem is not a minor one that can be fixed with economic growth, as earlier thought. Rather, the Survey says it is clear now that “growth will not solve the problems of the stressed firms; to the contrary, the problems of the stressed firms might actually imperil growth.”
 
The Reserve Bank of India (RBI)’s asset quality review showed the quantum of hidden bad assets hidden was so huge that provisioning requirements wiped off profitability at most banks. Public sector banks (PSBs) accounted for more than four-fifths of the bad loans, and their gross non-performing assets (NPAs) topped 12 per cent. On the corporate side, around 40 per cent of the companies had interest coverage ratio of less than one, indicating their inability to service debt. This is “not just a small amount of stress, but one of the highest degrees of stress in the world,” the Survey said.
 

Instead of triggering bankruptcy, banks extended time to companies and restructured more than 6.4 per cent of their loans by 2014-15, as well as extending fresh loans.
 
“As a result, total stressed assets have far exceeded the headline figure of NPAs.” The Survey estimated if “evergreened” loans were added, total stressed assets would amount to about 16.6 per cent of banking system loans - and nearly 20 per cent of loans at PSBs.
 
Worse, earnings of companies with inadequate debt servicing ratio have fallen more than 40 per cent “in less than two years”. Selling off assets had bought them time, but resulted in lower revenue generation.
 
But, the profitability of Indian firms had increased recently, even as revenue remained flat, it said. Analysts attribute this to lower crude oil prices. Indian companies’ profitability grew at 16 per cent for the three months ending September 2016.
 
Nevertheless, TBS is taking a heavy toll on the health of PSBs. 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 NPAs.
 
“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.”
 
The return on assets of these banks have turned negative in the last two years and investors are trading the stocks at discounts.
 
Clearly, schemes offered by RBI have not worked. The banks have largely failed to nurse back companies whether through strategic debt restructuring (SDR), the scheme for sustainable restructuring (S4A); the joint lenders’ forum has also not worked as desired. Asset reconstruction companies (ARC) have also largely failed in recovering the loans as was envisaged.
 
The Survey hoped the Bankruptcy Code could address some of the problems. Or, as other Asian countries have demonstrated in the 1990s, a set up like the ‘Public Sector Asset Rehabilitation Agency’ (PARA) can be created that can take drastic measures to effectively cut down on the TBS problem.