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Dear Readers,

NPA-Stressed Assets: The non-performing assets (NPAs) of banks have become a great concern for the central government, banking industry, promoters, entrepreneurs and startups. While multiple factors were at play for the loans turning bad, there is a tendency to suggest that an industry-banking nexus has been responsible, more so if that pertains to the private sector industrialists. It is true that there were a few black sheep in the flock who had indulged in diversion of funds, but that does not mean all industrialists would be painted with the same brush. Such diversion was a miniscule segment of the industry. The others have been victims of circumstances. It must be kept in mind that several PSUs are incurring heavy losses. Do they get such bad media coverage?

Bharatwasis should recall that entrepreneurs, industrialists, promoters and small scale business owners had also contributed to the independence and industrialisation of Bharat. Their drive for industrialisation had started even before the country gained independence. They had cooperated in all ways with all the stalwart political leaders and Bapu (Mahatma Gandhi) for independence.

Businessmen, like mother, would never think of harming their ventures, which is like their children. An entrepreneur nurtures a business venture with his own money, with money borrowed from family members, relatives, friends and lending institutions. He tries his best to ensure that his enterprise bears fruits for his family and others for generations. There may be a few exceptions which are typically Dr. Jekyll & Mr. Hyde cases and such exceptions are there in all segments. Such exceptions need to be identified and dealt with sternly.

Every sector of business has its cycle of recession and boom. Like human beings, when a business becomes sick, it needs to be intensely treated, and if required even fresh blood needs to be infused in terms of capital, new management or new talent. A sick unit is like a sick person needing thorough check-up and treatment.

An industry can be under stress due to several factors beyond the control of businessmen. These include:

1. External effects ― (a) Global competition, (b) Dumping of goods, (c) Go slow strikes, low productivity, (d) Unions’ militancy, (e) Non-payment or delayed payment by debtors, internal and external (f) Fall in demand, (g) Rise in cost of production, (h) Creation of excess capacity, and (i) Springing up of new industries with large incentives by the Government.

2. Changes in Government regulations ― (a) Frequent policy changes, (b) Cancellation of license like that of coal mines, (c) Non-payment or long delays in payment by Government and its agencies, (d) Reneging on contracts by Government and its agencies, and changing perceptions/assumptions (e) Multi-level and multifold approvals leading to administrative delays, (f) fear psychosis in decision taking and (g) Public hearing for green environment.

3. Changes in Banking regulations ― (a) Inadequate funding, (b) Stopping of fund even for one day default now, (c) High rates of front charges compounded every month and Penal rules of interest, (d) Stringent RBI provisioning norms not aligned to market realities, (e) Frequent policy changes and compliance norms by regulatory authority, (f) Administrative delays lead to heavy cost overrun, and (g) Errors in judgments by professionals in loan evaluations.

After independence, many private banks had become operational. Big industrialists were running banks, for instance, the Birla Group had United Commercial Bank. Almost all private banks were nationalised in 1969 by the Government. Later, after the lapse of a decade, few licenses for private banks were given which are quite successful. Bankers have been bearing with businessmen to run these enterprises with faith, according to the situation and inducting fund with vigilance. Businessmen have been concerned with their goodwill and brand name.       

The need is to examine the reasons of sickness and NPA in each sector like steel, power, aviation, infrastructure, real estate and others. Same yardsticks will not give desired results and solutions. Timely action is needed, not blame game. No arrest or vilification should be done without proper investigation, trial and judgment. Steel industry was bleeding from 1993 to 2003 but had done well from 2003 to 2010-11. Excess capacity was built up by huge investment creating employment. But imports of cheap steel from China and other countries had affected the domestic industry. Since the last nine months, the industry has been reviving due to restrictions on imports of steel. The highest NPAs are in steel, second in National Highways. Almost 75 National Highways are at a standstill because of uncompetitive rates. The third largest NPAs have been created in the power sector. The fourth contributor to NPAs is the state distribution companies. Aviation has been a victim of many of reasons cited above for assets becoming stressed. High fuel cost, changing routes have been affecting the industry.

Banks and NBFCs should be allowed to develop the NPA norms, which are in alignment with those of the US and Europe. The regulator should leave the decision for provisioning, inherently a commercial decision, to the financial institutions. The NBFCs are already embracing the Ind-AS norms from April 1st 2018. Under the new accounting norms, the provisioning has to be based on perceived losses and not on incurred losses.

The Finance Minister has given reasons for NPAs in steel, power and infrastructure. Why were practical solutions not taken in time? Why blame only bankers and industrialists? The power sector will add Rs. 5 lakh crore to NPA if coal is not supplied, mines are not renewed, if payments by state agencies, distribution companies are not made, if power purchase agreements are not honoured.

The existing laws were not aligned with the market realities and had several shortcomings. There has been no single window resolution available and the resolution and jurisdiction are with multiple agencies with overlapping powers leading to delays and complexities. Under the Insolvency & Bankruptcy Code (IBC), lenders have to take haircuts of 40% to 80%, but had the proper mechanisms been in place, timely action could have revived the same companies with existing entrepreneurs with just 10% to 20% haircut by lenders. Banks have been overcharging the accounts in their zeal to show profits. Had they charged a lower interest rate (say 9%), the burden on the entrepreneurs would have been less and payback of all dues would have been possible in better or boom time. Now banks would have to sacrifice the profits which they had earlier booked. Liquidation must always be the last resort under IBC.

The idea of Bad Bank has not been favoured. The Sunil Mehta Committee has suggested the setting up of an Asset Management Company or Asset Reconstruction Company. Banks and overseas investors are to fund it. Expert professionals are to oversee turnaround of the assets. By September 2018, over Rs.  3.8 trillion worth of stressed assets could be coming up for resolution. According to former Chief Economic Adviser Arvind Subramanian, the IBC is a better process than other suggestions of Bad Bank or Assets Management Co. etc. Stressed assets under Asset Management Co./Bad Banks/Reconstruction company will have the same fate like that of several PSU undertakings, which are incurring losses for decades. National assets will be wasted. Unemployment will be created. Better to restructure dues/ loans with the existing promoters with a financial controller or expert of that business. Promoters should also be allowed to bid.

Consolidation and merger of PSU Banks are not the solution. It would be like white elephant for show only. Need is to realise quietly and puts the assets on working. Infuse capital by public issue at realistic price. Liquid money of small investors will chase the issue.

Indian Economy: India’s growth is 7.7% in the fourth quarter of 2017-18, surpassing China’s GDP growth of 6.8% in the same quarter. GDP growth of 7.4% and 7.8% is projected for 2018-19 and 2019-20 for India by the International Monetary Fund (IMF). IMF has made the following suggestions for India so that the high growth rate can be sustained: a) undertake banking sector reforms, b) continue with fiscal consolidation, c) simplify, streamline and lower GST. Revival of bank credit and efficiency is essential. Proper land and labour costs and business climate are required for competitiveness and high rate of growth.

The US initiated trade can have far reaching consequences. The retaliatory action by European Union, China, Canada, Mexico, India is a signal to the Trump Government that other countries are not going to take US diktats lying down. For the time being, the war will not affect India much, although India enjoys a merchandise trade surplus vis-à-vis USA of the size of almost 1% of India’s GDP. China will be affected the most by the trade war.

FIIs may prefer to invest in India’s equity and debts. The market will remain volatile unlike last year. Some risks are associated with valuations, geopolitical situation, world trade wars, and domestic political uncertainty. The government taking more populist measures including too much regulation of the economy keeping in mind the 2019 General Elections. MSMEs will suffer the most. It will be prudent to stay away from MSMEs stocks until stocks are very cheap?

Minimum Support Price: Sharp increase in the minimum support price (MSP) is good to alleviate the farmers’ distress. But it will fuel inflation and affect exports. Farmers may not be benefited as expected due to poor procurement mechanism. Business Economics reported that substantial quantities of farm products have not been procured. There will be more corruption, particularly when market prices are low. It would have been better to waive off farm loans for marginal farmers, give subsidised agriculture inputs including fertilisers and free cattle to have alternative income so that a marginal farmer is not depending on agriculture products only. The fiscal deficit might widen. The RBI may raise interest rates to counter inflationary impact. But this step will dampen the investment climate. The promise of ‘Make in India’ will face another setback.

May God give Bharatwasi practical wisdom to solve many complicated problems for inclusive and sustainable growth of the Nation. Let us not stigmatize capitalism. Socialism, Communism have failed. Let us have combination of Socialism and Capitalism with mission and vision to save the Nation by working hard with devotion, fearlessly, righteously and selflessly.