RBI will have to deal with the stressed assets in a scientific way as soon as possible
Reviving a decelerating economy and putting it on a high growth trajectory depends heavily on resolving the stressed assets and loans held by state-run banks. An early resolution of rampant defaults by corporate sector must be resolved at the earliest to bring the economy back on a healthy growth curve.
Baby steps seem to have been taken by Reserve Bank of India (RBI) and finance ministry which have come up with a list of top 100 corporate defaulters across sectors, including telecom and power where the public sector banks exposure is highest.
Finding a viable solution to stressed assets to the satisfaction of all stakeholders, including companies, banks, depositors and the government will be the starting point for injecting life into an economy losing steam quickly.
Finance minister Arun Jaitley’s top priority should be to resolve the mess left behind by the successive Congress-led governments that leveraged public sector banks to clinch sweet heart deals with willing company managements as well.
Business failures owing to a host of factors like demand-supply issues in domestic markets, tepidity in geographies abroad coupled with pricing and regulatory issues must seriously be flagged by the RBI while advising state-run banks in dealing with over Rs 600,000 crore worth of stressed assets.
Bankruptcy and insolvency code that has been approved by both houses of Parliament will also be put to test in the latest exercise initiated by RBI to deal with genuine defaults that should not be mistaken for willful defaulters of the Vijay Mallya kind. One key issue that may still be difficult to resolve would be in cases where assets and loans were sourced in foreign currencies from institutions abroad. The restructuring plan cleared by RBI for implementation by state-run banks may not necessarily be acceptable to these foreign banks and institutions. Since Indian bankruptcy and insolvency laws were not in sync with UN legislation, the foreign banks have no obligation to accept the RBI plans or even if the Supreme Court intervenes. Secondly, Indian government has till date not signed any treaties to facilitate workable arrangements in cross-border solvency cases. In most cases either the English laws or Chapter 11 norms put in place by the US will kick in where there are large and genuine business defaults.
For instance, RBI will have to find a way to bring 35,900 MW worth stressed assets in power sector back into reckoning. Most of these independent power producers have partly availed loans as well as equity from foreign companies. Hence, solvency solutions provided by the Indian central bank may not be binding on these equity holders and banks. Power minister Piyush Goyal’s idea of dumping stressed assets on NTPC to operate on behalf of banks may be untenable on ground. One must not forget that NTPC has not been able to wriggle out of the stressed assets left by Enron Corporation at Dabhol Power even after 15 years.
Several telecom services providers have over-leveraged their balance sheets to fund the expensive spectrum acquisition in the last four rounds of bidding. This serious cash crunch, falling aggregate gross revenues realisation with entry of Reliance Jio has left even foreign players like Vodafone panting for breath. There are no easy solutions for RBI to deal with the huge pile up of telecom players’ loans with banks given the tight cash flows vis-à-vis growing interest liabilities as well as unpaid loans.
RBI will also face the biggest dilemma while dealing with infrastructure project players where unfinished projects in roads, steel, ports and airports have had a bearing on their capability to repay the banks.
Aggression in resolving genuine bad loans could also be perceived as favouring a few corporates by the Narendra Modi government. The opposition may not let go of an opportunity to tarnish the government’s image and score brownie points.
Without ‘favour or fervor’, RBI will have to deal with the stressed assets in a clinical fashion and most scientific way. It’s a good beginning and a logical solution must be in sight, if not today, tomorrow.