Is it time for government to purchase stressed assets?

India is today the world’s fastest growing major economy. Yet, there is a dearth of private investment, both by domestic and foreign investors.

This is closely linked to the inability of banks to finance new investments, because they are saddled with huge non-performing assets (NPAs).

High interest rates in India have made the cost of capital higher in comparison with its major global competitors like China.

This has resulted in making Indian companies non-competitive, thereby making assets unproductive, with large investments being tied up.

Poor infrastructure has its impact

Another reason for Indian companies being non-competitive has been poor infrastructure, which is impacting all the sectors as it is affecting the efficiency and increasing the operational cost, transportation time and cost.

To stimulate growth and to generate new employment opportunities, the government and the Reserve Bank of India (RBI) need to extend support to the industry and entrepreneurs, by which they are not afraid of taking calculated risks. This is also the only way by which the government can pursue its goal of Start-up India and create millions of new entrepreneurs. 

But for that we must solve the problems of the past that are preventing banks from lending again. Companies, where the management has wilfully become defunct due to mismanagement, should be dealt with sternly.

However, cases where companies become sick due to reasons which are beyond the management’s control should be facilitated with investor-friendly polices by:

Addressing the industry-level issues through proper policies which brought the companies to such a poor stage, and
Enacting appropriate laws and rules to help them retrieve whatever is possible from the assets to service their respective dues.

It needs to be understood that locking of capital in unproductive assets is not the solution, as it will not generate any income to service the debt, pay taxes or salaries.

There may be a few cases where change in management may also be required in cases where either earlier management has been disbanded or the existing management is found to be wanting of ideas, willingness and creativity. It is not east to find people with entrepreneurial skills and risk-taking appetite.

Critical analysis needs to be done

It is critical to review and understand the reasons why a company is under performing and the existing management of that company should be offered a chance to revive the company before a new management team is brought in.

The main intent of the current SDR regime is to allow financial institutions to revive stressed company/project by taking control over the company/project by converting the debt/exposure into equity.

 Post-conversion into equity, in eighteen months, the financial institution needs to sell the equity by bringing in a new project sponsor thereby recovering its investment.

RBI has granted an 18-months standstill period keeping in view that the banks do not have expertise to run and revive the projects.

Special Situation Funds

In this context, we feel that banks may be encouraged to form specialised entities (like a Special Situation Funds) to manage the equity stake acquired through debt conversion in distressed assets and till such time five-year standstill may be considered against the existing 18-months period. Such a fund shall have flexibility of developing in-house expertise and inviting investors.

During the standstill period, the asset should be immune from past statutory dues.
There should be provision to convert remaining equity with the erstwhile promoter, into unsecured loans/other instruments which can be subordinated to lenders’ dues. Such equity may also be written down.

This is to give the incoming promoter full management control/operational flexibility so that they can take progressive decisions without interference.

In many cases, even with the best intention of the sponsor/promoter, the project/asset becomes an NPA due to reasons beyond their control like delayed land acquisition, government approval, certain judicial pronouncements, etc. In such cases, the financial sponsors, after necessary due diligence, should involve the existing promoter/sponsor and complement it with necessary competent professional management team.

Increased role for IFCs and NBFCs

Today, Asset Reconstruction Companies (ARCs) are facing challenges in terms of the capacity and necessary expertise to handle the growing stressed assets portfolio.

RBI should allow specialised financial institutions like Infrastructure Finance Companies (IFCs) and other Non-Banking Financial Companies (NBFCs) having adequate expertise in managing assets to acquire and deal with stressed assets. The IFCs and NBFCs can not only bring additional financial resources but can also provide management capability thereby increasing the probability and speed of recovery.

The current economic tsunami has burdened the Indian financial sector with huge amount of NPAs where proactive intervention of the government is imperative for restarting the economic growth.

Troubled Asset Relief Programme needed

In 2008, the US government quickly assessed the impact of the financial crisis and it launched ‘The Troubled Asset Relief Program’ (TARP), a programme to purchase stressed assets and equity from financial institutions to strengthen its financial sector.

It purchased close to $426.4 billion worth of stressed assets which helped the financial sector recover quickly. In 2014, TARP sold all its investments for $441.7 billion, thereby ending the programme without making any loss.

The Indian government needs to look at creating the India Revival Fund on similar lines to help the financial system tide over the tsunami.

Need to compliment NIIF

The government needs to be complemented for creation of the National Investment and Infrastructure Fund (NIIF). I am sure that the NIIF will play an active role in providing the necessary capital to assets stuck midway due to lack of appropriate equity. This will help the banking system reduce its NPAs and resume lending again to revitalise growth.

(The author is the president of ASSOCHAM)