Will Survey’s PARA be the panacea for bad debts?

Bad debts of Indian banks, particularly those of the public sector banks (PSBs), have been a festering problem. Over the past 25 years, since the first wave of reforms were unleashed, there have been numerous solutions.

Whether it was Lok Adalats, debt recovery tribunals (DRTs), Sarfaesi Act, asset reconstruction companies or, more recently, the insolvency and bankruptcy laws, at intervals of every few years a new creation is touted as the solution to all existing problems of banks.

After much huffing and puffing, that new creation comes and begins traversing the same route that all its predecessors had discovered years earlier. But success has remained elusive — providing just more grist for the writer’s mill.

In that long list of continuing attempts to solve this issue, comes another suggestion from the Economic Survey 2016-17. After a lot of hand-wringing about the bad debts and stressed assets problem and how India has had a twin balance sheet problem but which was different from the rest of the world, the Survey floats an idea called ‘Public Sector Asset Rehabilitation Agency’ or PARA.

The Survey says that a centralised approach to the debt problem will be more effective than what has been tried so far. It notes approvingly that the East Asian countries that faced a debt problem in the late 1990s were successful in handling it within two years because of this approach, whereas we are still grappling with the same problem for the past eight years.

PARA will take over the stressed assets of PSBs and separate the problem of debt from the capitalisation problem that these banks face. The Survey claims that PARA will solve the coordination problem since all debt will be centralised in it and it will have an explicit mandate to recover money in a defined time period.

As for funding PARA, it suggests that it can be done either by issue of government securities, recourse to capital markets, or through the Reserve Bank of India. Lest the experts scream that this will erode the RBI’s resources, there is a very helpful table showing that the RBI has ‘excess capital’ when compared to many other central banks.

As for the problems that PARA will encounter, the Survey notes that political willingness to recognise the problem and deal with the consequences of a loan write-off, has to be there. It needs to be staffed by independent and competent professionals and as for pricing of the assets (which PARA will take over), it must be on market-determined basis.

Given the limitations of a government study, perhaps it could not have gone much further than this.

But look at the political slugfest that is going on over the Kingfisher Airlines bailout — and it will be clear that few politicians will be willing to stick their neck out and bear the brunt when things go wrong.

Homilies delivered on risk-taking from various industry-government platforms are not to be taken seriously — if the conduct of the political parties when they enjoy and lose office by rotation, is anything to go by.

As for pricing of assets being market determined, just ask the existing asset reconstruction companies — their ineffectiveness is a testimony to why determining the ‘market price’ won’t be easy. It is unclear from the Survey why the experience of PARA will be any different.

As a trial balloon with official blessing, it may serve its purpose. It is bound to keep the seminar circuits agog for the next few months.

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