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