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The Economic Survey and the 'Twin Balance Sheet Problem'

Prosenjit Datta     January 31, 2017

The Economic Survey devotes considerable attention to what it terms India's Twin Balance Sheet problem - overleveraged and distressed companies and the rising NPAs in Public Sector Bank balance sheets. The issue is important because it is holding up private investment in the country and therefore, growth in all sorts of sectors. It has identified most of the issues that prevented many measures introduced by the government - from Sarfaesi Act, to Asset Reconstruction Companies, to Strategic Debt Restructuring  and the Sustainable Structuring of Stressed Assets. It omits mention of one important issue though why most of these measures have had only limited success. And that is the fact that while there are enough laws now for a bank or any other organisation to take over a stressed asset, it is much more difficult to dispose of them and get any decent money back.

Taking over a steel plant which is unable to meet its debt obligations using the SDR route, for example, might seem like a good idea. But if the steel sector is in distress, the bank will find it hard to get a good price for that asset from any buyer. Worse, it cannot hold on to it indefinitely - unless it keeps running, a physical asset tends to deteriorate very fast. And the longer it takes for a bank or an asset reconstruction company or any other organisation to dispose of it, the value continues to deteriorate.

Selling an asset easily depends a lot on the economic conditions - both for the country as a general and the sector in particular. For example, in the past two years, there have been many deals in the cement sector and some in the power sector with stronger companies taking over assets or entire divisions of weaker, overleveraged companies, sometimes with the helpful nudge from lenders to the weak companies. But not all sectors have seen similar deals. In places where there is tremendous overcapacity or where creating a new business is easier and less expensive than taking over an older one, these deals will not happen. Also, what happens to loans to a service oriented sector, say airlines. The reason bankers found themselves in a spot with Kingfisher and many other now defunct airlines was because the airlines had few tangible assets that could be sold off. Most airlines operated with leased aircraft and the lessor simply took back the aircraft.

The suggestion of the Economic Survey that a Public Sector Asset Reconstruction Company (PARA) be formed to buy the biggest, most complex NPAs and then dispose of them. It might seem like a reasonable idea but it fails to take into account that the PARA (which others have dubbed a Bad Bank) will face the same problem disposing assets. If there is a market for the stressed asset, recovering money would not be a problem. The real issue now is that there isn't much of a market for stressed assets in many sectors plagued with overcapacity.


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