PUBLIC SECTOR ASSET REHABILITATION AGENCY (PARA)

To resolve the twin problems of ‘balance sheet syndrome’ (of the banks as well as the corporate sector), the Economic Survey 2016-17 has suggested the Government to set up a public sector asset rehabilitation agency (PARA)

—charged with the largest and most complex cases of the ‘syndrome’. Such initiatives were successfully able to handle the ‘twin balance sheet’ (TBS) problems in the countries hit by the South East Currency Crises of mid- 1990s. As per the Survey, the Agency charged with working out the largest and most complex cases. Such an approach could eliminate most of the obstacles currently plaguing loan resolution.

• coordination problem as in this case, the debts would be centralised in one agency;

• it could be set up with proper incentives by giving it an explicit mandate to maximize recoveries within a defined time period; and

• it would separate the loan resolution process from concerns about bank capital.

The Survey has outlined seven reasons in support of its suggestion for setting up the PARA—which are as given below34:

(i) It’s not just about banks, it’s a lot about companies. So far, the NPAs issues revolved around the capital of the bank and how to fund them so that they start giving loans again. But more important issue is to find out a way to resolve the NPAs created by the corporate houses (as why they are stressed).

(ii) It is an economic problem, not a morality play. Diversion of funds (wilful defaults) have undoubtedly been one reason behind non-payment of the debts. But a large number of loan defaults have been caused by unexpected changes in the economic environment—timetables, exchange rates, and growth rate assumptions going wrong.

(iii) The stressed debt is heavily concentrated in large companies. This is 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.

(iv) Many of these companies are unviable at current levels of debt requiring debt write-downs in many case. 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 per cent 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.

(v) Banks are finding it difficult to resolve these cases, despite a proliferation of schemes to help them. Among other issues, they face severe coordination problems, since large debtors have many creditors, with different interests. If PSBs grant large debt reductions, this could attract the attention of the investigative agencies. But taking over large companies will be politically difficult, as well.

(vi) Delay is costly. Since banks can’t resolve the big cases, they have simply refinanced the debtors—deteriorating the situation. But this is costly for the government, because it means the bad debts keep rising, increasing the ultimate recapitalization bill for the government and the associated political difficulties. Delay is also costly for the economy, because impaired banks are scaling back their credit, while stressed companies are cutting their investments.

(vii) Progress may require a PARA. The ARCs (Asset Reconstruction Companies) haven’t proved any more successful than banks in resolving bad debts. But international experience shows that a professionally run central agency with government backing (not without its own difficulties) can provide the solution in this regard.

By late February 2017, Government hinted towards its interest to the idea of PARA. But before the idea takes shape several related issues are to be settled by the government, such as—its funding mechanism; selection of the companies for their balance sheet resolution; recovery mechanism of the banks’ NPAs; etc. among others.

SARFAESI Act, 2002

GoI finally cracked down on the wilful defaulters by passing the

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

The Act gives far reaching powers to the banks/FIs concering NPAs:

1. Banks/FIs having 75 per cent of the dues owed by the borrower can collectively proceed on the following in the event of the account becoming NPA:

(i) Issue notice of default to borrowers asking to clear dues within 60 days.

(ii) On the borrower’s failure to repay:

(a) Take possession of security and/or

(b) take over the management of the borrowing concern and/or

(iii) If the case is already before the BIFR, the proceedings can be stalled if banks/FIs having 75 per cent share in the dues have taken any steps to recover the dues under the provisions of the ordinance.

2. The banks/FIs can also sell the security to a securitisation or Asset Reconstruction Company (ARC), established under the provisions of the Ordinance. [The ARC is sought to be set up on the lines similar to the USA, few years ago.]