Finance Minister Arun Jaitley has a solution to reduce the bad debt problem in the Indian banking system. He wants well-performing public sector enterprises in steel, power and shipping - sectors that are under severe stress - to manage the operations of private companies that have defaulted on their loan payments.
Central PSUs, such as NTPC and SAIL, were among those nominated for the purpose. Considering that over 90 per cent of bad assets are with public sector banks, it is not difficult to understand that the PSUs will, in effect, have to bail out their counterparts in the financial sector - putting an end to their perennial and ever-ballooning non-performing assets problem.
On the face of it, the plan seems to be borne out of desperation than logic. Else, how can one expect to see PSUs nurturing troubled private companies back to health when they themselves are not in the pink of health? SAIL, the government's flagship PSU in the steel sector, registered net losses of Rs 4,137 crore in 2015/16. Its market capitalisation dropped 34 per cent to Rs 18,780 crore between October 2015 and September 2016, against the Rs 28,577 crore in the year-ago period. In fact, the Ministry of Steel had in December last year appointed an external consultant to help the company improve its performance.
In a little over one year after coming to power, the Narendra Modi government had launched an 'Indradanush' package to recapitalise PSU banks that were reeling under bad debts. Alongside, the Reserve Bank of India floated a strategic debt restructuring (SDR) scheme, and a scheme for sustainable structuring of stressed assets (S4A) earlier this year, to allow lenders to convert their debts into equity and even take over management control of defaulting entities. The banks were to find buyers for such 'acquired' assets to clean their books. They were also permitted to explore the possibility of preparing a panel of management firms or individuals having expertise in running such companies to manage acquired assets till the ownership was transferred to the new promoters.
The schemes did not take off. There were few 'buyers' or 'managers' who came forward. Of the 21 companies that were brought under SDR, only one or two attracted buyer interest. One cannot blame the investors either. Stressed assets do not come unencumbered. They are not clean from litigations and it is natural for anyone to think twice before putting money into such companies or assets.
By asking PSUs to play the interim operators' role, Jaitley is trying to fix this 'lack of interest'. By turning bad debt into equity, the NPA burden might reduce, but if the acquired assets underperform, and banks fail to find new promoters, it will be a recipe for disaster.