Stressed assets’ resolution: Reforms in reverse gear?
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The resolution of stressed assets seems to have taken a new turn. According to news reports, the government decided that lenders or public sector banks (PSBs) will take over the bad debts in steel, power and shipping sectors; these, in turn, will be provisionally managed by public sector undertakings (PSUs) such as NTPC Ltd, SAIL Ltd and Cochin Shipyard Ltd. The mechanism, as understood from the brief reports, will be to convert part of the debt into equity to allow PSBs to take control of the struggling units, followed by appointment of a management team of specific PSUs to operate these firms.
This surely is nationalization, for both lenders and management are government-owned, although the government emphasized this is not the case. Nationalization, by definition, is the process of transforming private assets into public assets by bringing them under the public ownership of a national government or state. To the extent the public sector balance sheet is involved, this is qualitatively not very different from nationalization. Off-budgetary, contingent liabilities may rise too. As the price at which the existing debt is being valued, the nature of managerial decisions and time period under PSU management still remain unknown, the uncertainty could elicit some caution and discomfort by rating agencies and analysts who could consider this a regressive step.
The government says a fundamental problem being faced in resolving these troubled loans (steel, power and shipping account for the bulk) is that “there are no takers for these assets”; hence the intention is to create takers. In asset sales or disposal efforts by lenders, the key stumbling block has been the price or valuation of bad assets with a large gap vis-à-vis buyers’ expectations. Asset reconstruction companies (ARCs), for instance, have found banks’ valuations too high, implying reluctance of banks to accept a discount or haircut and book losses in disposing these off. Likewise, high reservation prices in property sales have visibly resulted in no bidders. It is noteworthy that several promoters have sold healthy, cash-generating units to reduce debt elsewhere. How the pricing issue is now dealt with—this relates to how stressed assets are classified, determined viable or worthy of revival—will be important for raters and analysts, if only for the impact upon the public sector balance sheet.
Under the strategic debt restructuring rules, banks have also struggled with lack of expertise—attracting new promoters to replace existing ones and managing acquired units has been far from their core professional competence. This impasse is now sought to be broken through public management of a matching hue by relevant PSUs. Here, the assumption is that an experienced, successful PSUs will do a better job than existing private sector managements. It is not entirely clear as to how and where from efficiency gains can be made through transfer of management from private to public? Another worry is that critical decisions related to recovery, write-offs, sales and price realizations might be delayed or postponed given some fundamental problems affecting these three sectors. For example, China’s permanent slowdown, secular stagnation in advanced economies and enormous capacity overhang have altered demand scenarios of the steel industry; collapse in trade volumes have contracted shipping business worldwide; while power sector is struggling with low domestic demand and future uncertainty about restructuring and pricing.
On the surface, this seems the reverse of reforms which normally imply a freer play of market forces, realignment of incentives through privatization and efficiency gains from resulting increases in productivity. More light will be shed when full details of the mechanism are known.
Renu Kohli is a New Delhi based economist.