Thursday, 14 December 2017

Out of box thinking for NPA funding of bankers.

At the outset, it is relevant to mention that this blog avoids statistical details, as the intention is to keep it simple for common man. There is no point in engaging statistical wars by either side of the political parties. In short, we do not want to be bogged down in too many numbers and move away from a statistician’s paradise. 

Background of Legacy:
The high growth rates of GDP of past ten years of UPA government has ended up in a huge legacy of NPA of banks passed on to NDA government. People claim of huge GDP growth rates have to always factor NPA effect on GDP created. Not only the fact that the GDP growth of UPA was cash driven, speculative jobless growth rate, but it also led to mind boggling risks and the consequent NPA menace. It is like selling by a corporate showing a huge growth rate in one year, but all their sales later ended up in bad debts.

Remedial measures:
-People talk about “bail in” and “bail out” strategies. ‘Bail in’ involves hair cut for deposit holders of the bank. ‘Bail in’ is ruled out as hard earned money of depositors cannot be subjected to the mad risks of the policy makers. Under current regulations, only RS one lakh  is the amount depositor gets if any bank fails. 
-“ bail out “ involves deployment of tax payer money for the mad growth ended in bad debt pile up. Even this is a strain on tax payer. For no fault of them they had to bear the problems caused by few defaulters.

Then what is the way forward?
Way forward:
- Typically the regulators ask for dividing these bad debts into
   - those caused by strategic failures
   - those caused by sector failures
   - those caused by system failures
   - those caused by ethical failures
and so on. 
The sector failure units need to be kept in ICU with the carrot of special facilities, while the ethical failure units need to be shown the stick for recovery. 
This is the typical regulator’s copy book recommendation. 

But will it be enough?
- even if the stick is taken against bad units how much recovery is possible? Some hair cuts are imminent. Who will bear that?

Way forward:
- we need a definite one time fund for bail out
- the debt monitoring has to be vigilant in future by all stakeholders (the  monitoring system to be revisited by regulators). Any single default of a unit should trigger a default alarm for the whole group funding and the radars of monitoring should not be lazy in exhibiting the detective signals. Also, the monitoring bodies should pick up the signals quickly and act as an agile watch dog and not as a pet dog wagging tails.
- the banks with low NPAs should be recognized, recorded, and rewarded with best bank award   They should be given special incentives for their branch expansion needs , preferential repo rates and such other incentives while the high NPA banks should be demoted in status. 
- the GDP growth of a period say five years has to be corroborated with NPA of that time horizon and the review  mechanism should change accordingly. No point in showing a huge GDP growth by one government and walk away with laurels, while the new government takes over the legacy of NPAs. The people should ask for a score card on both fronts of GDP growth and NPA score.

Are there any avenues other than tax payer money?

Out of box thoughts
These are brain storming thoughts which are just thrown at. They are subject to debates, deliberations before adoption. They are not copy book ideas of text books. They can be shot at first sight by puritans, but we feel throwing up such ideas is a continuing necessity, given the huge backlog of the bad debts we face through the banks. 

What are they?

The bail out funds can come from the new sources as below-
 - As far as sector failure driven genuine bad debts, the banks may look at conversion of such corporate’s entire debt as a zero coupon bonds of 7/14 years. This will enable the continuation of the debt without interest servicing for the affected units. With zero interest the unit may come into profit zone quickly and such profit can be used for pay back of such zero coupon bonds
The banks may be allowed to get refinance of these bonds from a newly constituted recovery fund institution. The recovery fund institution can be funded by drawl from foreign exchange reserves held by government (say 1 billion dollar out of 400 billion dollars).
The money declared bad today becomes good with sectoral changes over a long 7/14 year span. The long period of such funding can come from forex reserves held by the government. This can be used to fund today’s bad debt, which can turn into good tomorrow for sure. 
- As far as those which are bad for sure, what are the ways to finance other than tax payer’s money? Can we think of some such possibilities? Some of them are tossed up below:
- Allow a new stream of earnings for bankers which will fund such bail out requirements. What is it? If a bail out funds full or part of say “x bank” can given by a brand owner for a consideration against permitting such brand owner to co-brand the deposit schemes. Say the fd scheme of the bank can be called “x bank Reliance fixed deposit” or even a branch branding - “ x bank Tata Anderi branch” 
The co-branding rights say for five years can be a consideration for the bail out funds offered by the brand owner. The mutual valuation of such co-branding rights have to be arrived at by both either on one to one or at an auction. Anyway, the brand owners spend a huge sum for brand building. Or the CSR budgets of healthy corporates can use this opportunity of combining CSR (bail out as a cause) and branding benefits.
- An additional portion of disinvestment of government holdings can be earmarked for one time bail outs. 
- A portion of natural resource sale say spectrum/ coal mine or such other auctions can be reserved for one time bail outs. 
- Think of new fee based income that can accrue from sale of any new naming right/ branding right and use those proceeds for funding one tome options. (this new fee based income can be from any government depts including railways (for example naming a train by a brand etc..) Even the capture of black money sitting in overseas areas can be used. 

To sum up-One time bail out is imminent. Funding them from innovative methods can relieve tax payer’s burden. Further, the tightening up of system to reduce the  recurring NPA menace is also equally vital. 

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