Wealth Transfer through the Bad Bank
THE Modi government has laid out one more plan to “clean” the books of banks, especially public banks, by helping them get rid of Rs 2 lakh crore of loans gone ‘bad’. It has announced the creation of two institutions for the purpose. The National Asset Reconstruction Company Ltd (NARCL), or the “bad bank” in popular parlance, will take over the bad assets of the banks. The Indian Debt Resolution Company Ltd (IDRCL), armed with the necessary expertise, will ‘manage’ these assets and sell them at the ‘best possible’ price, to recover some of the money due to the banks. Presented as a novel method of resolving the huge bad debt problem, this exercise is nothing more than an attempt by the government to wipe its hands of a crisis its own policies created.
The Indian bad debt problem is severe because the State has in effect used the banking system as an instrument to mediate large unrequited transfers to big business. Much of these bad assets are large loans given to favoured corporates, that the borrowers chose not to repay. The public justification for default is unexpected business losses. But in many cases, there is ample evidence of promoters having walked away much wealthier while the banks were left without their legitimate dues. Sums recovered from the defaulting company and its promoters, based on guarantees or pledged collateral, have been minimal. Recovery has been dependent on finding buyers to take over the assets as a going concern or on sale through liquidation. The process has stalled in many cases, has taken far too long in others, and yielded disappointingly small amounts.
The government appears to have decided to close this chapter in a story of pay offs. The new bad bank system has been created to push banks into selling their bad assets at prices that imply large losses. In the first round, when Rs 90,000 crore of bad debts that have been ‘fully provided for’ would be transferred to NARCL, banks would be willing to take whatever little they can get, since the losses have been accounted for. After that the discount at which individual lots of bad debt would be sold has to be negotiated, with the bank getting 15 per cent of that discounted value in cash up front, and 85 per cent in the form of security receipts to be redeemed after the assets have been disposed of.
To persuade the banks to sell this second tranche,in excess of Rs 1 lakh crore, the government has offered a guarantee to cover the difference between the negotiated price of the loans and the value of actual sale. Security receipts would be redeemed at prices that reflect the originally negotiated discounts. Based on some opaque calculation, the government has decided that a sum of Rs 30,600 crore would finance this guarantee. If the government's assurances are genuine, banks should be able to demand and possibly get a better price and take a smaller haircut. Given the guarantee, the security receipts will not be treated as bad assets backed by bad loans. Since they will not have to be provisioned for, the banks get a partial reprieve. But if the market does not validate the price set for the loans, the government’s guarantee will come into play.
If it is the bank that takes the loss and is not recapitalised, there is a real danger that the ordinary depositor will have to bear the burden of the loss due to transfers to big business. If the government, through its guarantee, finances the loss, the tax payer and the ordinary citizen deprived of the benefit of that volume of government spending would be the losers. In sum, in whatever way whitewashed, bad debt and the schemes to deal with them are nothing more than means of engineering transfers of wealth to a few corporate houses at the expense of the rest.
(September 22, 2021)