Up until September 2019, banks in India have written off close to $39 billion or around `2 lakh crores of bad debt, and the Reserve Bank of India has indicated that the worst is not over. It is possible that bad loans may amount to another `9 lakh crores, and that it will take quite some time before the banks start reporting that they are out of high NPA numbers. Interestingly, the Bankruptcy Act, the NCLAT processes and the new legislations that the Government has brought in, have not brought much relief to the balance sheets of the banks, as resolutions are happening at a fraction of the debts outstanding, with banks having to deal with substantial write-offs.
Some estimates indicate that overall recoveries of bad debts in the last five years have been less than 30 per cent of the stressed amounts, leaving the banks to write off the balance amounts. There have also been concerns that that resolution processes are taking very long. A case in point is the Essar Steel resolution, which has taken nearly two years.
With slow processes, with little hope of realisation of the full value of the debt, facing the write off of a substantial portion of stressed assets, it is not surprising that banks have had their backs to the wall for over two years now. There is very little that the Government can do other than shore up equity, which would get eroded as further resolutions for a fraction of dues happen. As banks write off large amounts, they are getting even more cautious about taking care of the liquidity that they have, resulting in a funds crunch for industry as well as for businesses.
In such a situation, it is unfair to find fault with the banks for not providing debt for new projects or for being extremely cautious with fresh exposure. Denied of credit, there is little that large infrastructure projects can do. Add to it regulatory issues like land acquisition and environmental clearances, and we have a situation where entrepreneurs are reluctant to invest in long term projects. This applies to the real estate sector as well.
The problem extended to the financial intermediation sector as well, during 2019, with IL&FS, and a number of NBFCs facing the problem of weak revenues and the consequences of using short term funds to lend long-term. The asset-liability mismatch that ensued has had a number of these institutions reeling. Some measures brought in by the Government, including providing them access to overseas credit, is helping the better managed of these NBFCs to recover. It is possible that the NBFC crisis will be over in 2020, with some of the companies going under, while the others can emerge stronger and more confident.
Surprisingly, there is very little analysis and comment about how this all came about, and whether all the loans that happened between 2008 and 2012 were indeed properly scrutinised. Perhaps, because there is implicit knowledge that all actors, banks, politicians and bureaucrats are to blame, with the businesses taking advantage of a lax regulatory oversight season. It is also surprising that the lack of oversight by the RBI during these years has never been questioned.
Added to this has been the general slowdown in consumption, caused primarily by uncertainties of employment generation, slowing of consumption demand, especially in the automobile and engineering sectors. International trade has slowed, affecting exports, and oil prices have been volatile. And so we have a bad scene on hand. Lakhs of crores in Rupees of unpaid loans and write-offs are eroding into GDP and it is not surprising that growth figures are dismal.
Against this backdrop, it is easy to see that the monetary easing measures taken by the RBI, and the tax concessions granted after the budget by the Government of India, would do little to revive the economy. Several months after these measures have been announced, there is little evidence that consumption demand has picked up substantially, or that there is a significant recovery in the housing or the commercial real estate sector. There is a consequence in low GST collections because of the slowdown of the economy, an inability to meet the States' demands for GST compensations, a gradual erosion of State finances, and a feeling of helplessness all around.
Yet a lot has been achieved. The NCLAT (National Company Law Appellate Tribunal) process has established that there is no one above the law, and even the richest have to face consequences. Jet Airways, Zee and others could have got away in earlier political dispensations, but not now.
The GST, unpopular and poorly implemented, is yet bringing more and more businesses into the formal economy, with GST registrations doubling to over 1.75 crore entitites in the last two years. The e-assessment systems for Income Tax are working, leading to lesser harassment. The attempt to clean up is genuine, and though painful, will lead to a more transparent, rule- based system, with more sectors in the organised, tax-paying economy.
3-POINT DOABLE OPTIONS, THE WAY AHEAD
There is an opportunity to set things right, and not necessarily through monetary relaxation or fiscal easing. If the diagnosis above is correct, then there are a number of implementation solutions, some of which, based on 39 years of implementation experience in the State and at the Centre, I venture to suggest.
First, to get the private sector to invest, the project financing logjam has to be broken. The lack of specialised development finance institutions has led to poor risk assessment of projects, spreading of risk through consortium lending. To correct this, it may be possible to identify a single bank, say the SBI, for all infrastructure and long gestation project lending, assign specialists for project return and risk analysis, make them liable and responsible for their numbers, and give a target of `1 lakh crore for the coming year. The projects would take four or five years to fruition, and the annual outgo would be a quarter of the above sum. This amount could be guaranteed by the Centre, and even a budgetary support given-it would make only a small impact on the budget. There could also be a packaging of these loans into market priced bonds, with the markets evaluating the progress and the success of the projects, again with an inherent default guarantee from the Government. This would certainly re-enthuse entrepreneurs to take risks with large projects again.
Second, the fillip to the IT sector came about in the '90s and the millennium years through large tax reliefs and infrastructure support. The provisions of the Income Tax act enabled large investments to be made in this sector in the dotcom years, and have led to very large employment creation. It is possible to revisit this idea again, to pick up another major sector with large employment potential, say textiles, and give it all concessions, be it investment, tax relief, import relief, marketing support and concessional finance to revive and to modernise this sector. We could take a lesson from Bangladesh, which has successfully done this over the last two decades, to emerge as a foremost global exporter with the formal employment in this sector accounting for over 60 percent of all formal employment in that country. Any other potential sector could be chosen, but whichever one it is, all stops should be pulled out and all Government interventions in the form of taxation and regulations removed.
Third, there is an opportunity in agriculture. Good rains have ensured expectations of a good wheat harvest. Support to farmers should come in the way of export of surpluses as well as support for processing, especially for micro and small enterprises. Again, credit support, marketing support, and technology support should be geared towards creating thousands of small enterprises processing and marketing food and agriculture based products. At the same time, there is likely to be a shortage of pulses, and early action to import would help keep the inflationary pressures under control.
There are several other possibilities, including what could be done in Jammu and Kashmir, but these would do for a start. I reiterate, all these are implementable, and do not necessarily lead to significant monetary or fiscal pressures. It is clear that this dispensation has been poor in implementation, and it is time to focus on this. The strength of the Indian economy lies in the large consuming power, which can be energised by providing employment opportunities and investment facilitation.
(S. Narayan is a former Economic Advisor to Prime Minister A.B. Vajpayee, former Finance and Economic Affairs Secretary, Government of India)