Push to solve India’s twin balance sheet problem

The Public Sector Asset Rehabilitation Agency can tackle cases of over-leveraged companies and the rising bad loans in public sector banks

Updated - February 01, 2017 02:08 am IST

Published - January 31, 2017 10:52 pm IST - MUMBAI:

File photo shows people walking in front of a signboard displayed at the head office of State Bank of India in Mumbai. Photo: REUTERS

File photo shows people walking in front of a signboard displayed at the head office of State Bank of India in Mumbai. Photo: REUTERS

The Economic Survey called for a need to set up a government-owned asset reconstruction company, PARA (Public Sector Asset Rehabilitation Agency) in an attempt to resolve India’s twin balance sheet problem - over-leveraged companies and the rising bad loans in public sector banks.

Devoting considerable attention to India’s twin-balance sheet problem, the Survey said that the agency could take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt.

India’s NPA ratio at its current level of 9.1% of the gross loans is higher than any other major emerging market (with the exception of Russia), higher even than the peak levels seen in Korea during the East Asian financial crisis.

Advocating PARA to resolve the problem of twin-balance sheets (corporates and banks) to be funded by the windfall gain to the government (from the unreturned old demonetised notes), the Economic Survey said, so far, public discussion of the bad loan problem had focused on bank capital, under the assumption that the main obstacle to resolving the twin balance sheet (TBS) concern was finding the funds needed by the public sector banks.

“But securing funding is actually the easiest part, as the cost is small relative to the resources the government commands. Far more problematic is finding a way to resolve the bad debts in the first place,” according to the survey.

Limited success

Since other approaches to resolve the TBS problem had failed or had limited success, the Economic Survey noted that international experience shows that a professionally-run central agency with government backing – while not without its own difficulties — can overcome the difficulties that have impeded progress.

Stressing the need for PARA, the Economic Survey said stressed debt was heavily concentrated in large companies.

“Concentration creates an opportunity, because TBS could be overcome by solving a relatively small number of cases. But it presents an even bigger challenge, because large cases are inherently difficult to resolve,” according to the Survey adding that many of these companies were unviable at current levels of debt requiring debt write-downs in many cases.

“Cash flows in the large stressed companies have been deteriorating over the past few years, to the point where debt reductions of more than 50% will often be needed to restore viability. The only alternative would be to convert debt to equity, take over the companies, and then sell them at a loss.”

The twin balance sheet problem is a serious drag on credit growth. The setting up of a centrally-assisted rehabilitation agency will help in taking difficult decisions which the public sector banks are unable to take. Over the past few years NPAs of public sector banks have been rising and is a cause for concern warranting large write downs. The rehab agency could provide a via media. Harsh Goenka, Chairman RPG Enterprises.

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