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.
