12.20          ndian      onom
     Unlike the SDR arrangement, this involves no             (ii) It is an economic problem, not a morality
     change in the ownership of the company.                       play. Diversion of funds (wilful defaults)
                                                                   have undoubtedly been one reason behind
        PuBlIc sector asset rehaBIlItatIon                         non-payment of the debts. But a large
        agency (Para)                                              number of loan defaults have been caused
                                                                   by unexpected changes in the economic
     To resolve the twin problems of ‘balance sheet                environment—timetables,            exchange
     syndrome’ (of the banks as well as the corporate              rates, and growth rate assumptions going
     sector), the Economic Survey 2016-17 has                      wrong.
     suggested the Government to set up a public             (iii) The stressed debt is heavily concentrated in
     sector asset rehabilitation agency (PARA)—charged             large companies. This is an opportunity,
     with the largest and most complex cases of the                because TBS could be overcome by
     ‘syndrome’. Such initiatives were successfully                solving a relatively small number of cases.
     able to handle the ‘twin balance sheet’ (TBS)                 But it presents an even bigger challenge,
     problems in the countries hit by the South East               because large cases are inherently difficult
     Currency Crises of mid-1990s. As per the Survey,              to resolve.
     the Agency charged with working out the largest         (iv) Many of these companies are unviable
     and most complex cases. Such an approach could                at current levels of debt requiring debt
     eliminate most of the obstacles currently plaguing            write-downs in many case. Cash flows in
     loan resolution.                                              the large stressed companies have been
                coordination problem as in this case, the          deteriorating over the past few years, to
                debts would be centralised in one agency;          the point where debt reductions of more
                it could be set up with proper incentives by       than 50 per cent will often be needed
                giving it an explicit mandate to maximize          to restore viability. The only alternative
                recoveries within a defined time period;           would be to convert debt to equity, take
                and                                                over the companies, and then sell them at
                                                                   a loss.
                it would separate the loan resolution
                process from concerns about bank capital.     (v) Banks are finding it difficult to resolve these
                                                                   cases, despite a proliferation of schemes to
          The Survey has outlined seven reasons
                                                                   help them. Among other issues, they
     in support of its suggestion for setting up the
                                                                   face severe coordination problems, since
     PARA—which are as given below34:
                                                                   large debtors have many creditors, with
           (i) It’s not just about banks, it’s a lot about         different interests. If PSBs grant large
                companies. So far, the NPAs issues                 debt reductions, this could attract the
                revolved around the capital of the bank            attention of the investigative agencies.
                and how to fund them so that they start            But taking over large companies will be
                giving loans again. But more important             politically difficult, as well.
                issue is to find out a way to resolve the    (vi) Delay is costly. Since banks can’t resolve
                NPAs created by the corporate houses (as           the big cases, they have simply refinanced
                why they are stressed).                            the debtors—deteriorating the situation.
       34.    Economic Survey 2016-17, Government of India,        But this is costly for the government,
              Ministry of Finance, N. Delhi, Vol. 1, p. 85.        because it means the bad debts keep rising,