rnin    o io    onomi ss es         21.7
     Economic rather moral problem: Whenever public          handling bad debts, even if they don’t work them
     discussion starts on the TBS problem it is linked       out. The new bankruptcy law (legislated in 2016-
     to issue of crony capitalism, which looks correct       17) is yet to start functioning—even after it is
     also as many a time debt repayment problems             enforced, considerable time will be needed before
     have been caused by diversion of funds. But             it is ready to handle the large cases.
     another dimension should also be kept in mind—          Delay is costly: Since banks can’t resolve the big
     the problem has been caused by “unexpected              cases, they have simply refinanced the debtors,
     changes in the economic environment”, such as,          effectively “kicking the problems down the road”.
     the tenures of loans, exchange rates and growth
                                                             But this is costly for the government, because it
     rate assumptions going badly wrong. Thus,
                                                             means the bad debts keep rising, increasing the
     the problem is not a moral one but economic.
                                                             cost of recapitalisation for the government and the
     Repetitive narratives on crony capitalism may end
                                                             associated political difficulties.
     into punishing some but it fails us to think in the
     direction of incentive-based remedies.                  functioning of PArA
     Concentrated debts: Stressed debts are heavily          Possible variants are many though the broad
     concentrated in large companies, which look as          outlines are simple. It would purchase specified
     an opportunity because a relatively small number        loans (for example, those belonging to large, over-
     of cases need to be resolved. But large cases are       indebted infrastructure firms) from banks and
     inherently difficult to resolve and that will be the    then work them out, depending on professional
     challenge.                                              assessments of the value-maximising strategy.
     Debt write downs: Many of these companies are           Once the loans are off the books of the PSBs,
     unviable at current levels of debt, requiring debt      the government would recapitalise them, thereby
     writedowns. It is believed that about 50 per cent       allowing them to use their resources (financial and
     debt write-down may be needed to restore viability      human) in making new loans. Similarly, once the
     among them.                                             financial viability of the over-indebted enterprises
     Banks’ difficulty: Banks have faced difficulty to       is restored, they will be able to focus on their
     resolve NPA cases, despite RBI giving them              operations, rather than their finances. And they
     multiple choices. Among other issues, they face         will become financially fit to borrow and go for
     severe coordination problems, since large debtors       fresh investments.
     have many creditors, with different interests. If       Moral hazards: Such a move looks facing moral
     PSBs think of granting large debt reductions,           dilemma. Of course, all this will come at a price,
     this could attract the attention of investigative       namely accepting and paying for the losses. But this
     agencies. Debt restructuring by converting debt         cost is inevitable. Loans have already been made,
     to equity or taking over the companies and then         losses already incurred and because the PSBs are
     selling them in future to a prospective buyer—          the major creditors, the bulk of the burden will
     will be politically difficult, if they sell it at loss. fall on the government (though shareholders in
     ARCs proving futile: The Asset Reconstruction           stressed enterprises will need to lose their equity as
     Companies (ARCs) haven’t proved any more                well). The issue for any resolution strategy (PARA
     successful than banks in resolving bad debts and        or decentralised) is not whether the government
     are too small to handle large cases. The ARC−           should assume new liability. Rather, it is how to
     bank relationship can be inherently distorted; for      minimise a liability that has already been incurred
     example, ARCs keep earning management fees for          by resolving the bad loan problem as effectively as