OPEN APP
Home / Opinion / Views /  Opinion | India should stave off corona bankruptcies

The government plans to spend 20 trillion to aid Indians, revive the economy, and make it self-reliant, as Prime Minister Narendra Modi announced on Tuesday. The details of this massive package are awaited, especially the period over which this money will be spent and how funds will be raised. The hope is that enough will be done to shore up businesses reeling under India’s lockdown. Emergency credit facilities by the central bank may have helped some firms so far, but, by most accounts, private sector enterprises are under stress. If they are unable to regain momentum soon, many might see cash flows dry up. Bankers have been nervous about the ability of these firms to service their loans, a chunk of which could sour by year-end if an economic revival proves elusive. While the recent six-month suspension of some bankruptcy provisions offers borrowers a reprieve, lenders have been worried about the shape of their balance sheets a couple of quarters ahead. Already burdened by a high proportion of dud assets, our banking sector may require huge sums of capital infusion before the year draws to an end. Such an eventuality needs to be pre-empted.

One proposal doing the rounds is of setting up a “bad bank" that would buy non-performing assets (NPAs) off regular banks for reconstruction or disposal. Such a transfer of loans would relieve lenders and let them carry on with business, post-covid. This is an idea favoured by the Indian Banks’ Association (IBA), a lobby group, which is reported to be keen on a three-entity solution to a potential bank crisis: One government-backed company to pick up NPAs, another to manage them so that value could yet be derived from them, and a third to raise funds for the whole operation. Such an approach, however, depends on market demand for impaired assets, in itself a function of how much risk investors are ready to bear. In bad times, bad loans tend to find rather few takers, regardless of how cleverly they are lumped together to even out the worst ones. The best attempts of financial mavens to slice, dice and repackage those assets for further trading could therefore fail. In other words, without a speedy recovery from a global recession, a “bad bank" could end up as just another drain on government resources.

Unless fiscal relief money reaches businesses quickly, a lot of them might find themselves insolvent and dragged to court by creditors once the Insolvency and Bankruptcy Code is functional again. This would be unfair to companies that would have stayed solvent had it not been for the lockdown. To avert this, it may be worth the while of banks and their regulator to work out a good way to identify firms that were doing fine before the covid crisis struck and can survive to service their debts after the disruption is over. These companies would need not just special insulation from the insolvency law, but also credit support to get back in their groove. Arbitrary decisions in such an exercise can be minimized if the set of criteria used is laid down firmly and thrown open to public discussion. No business should be penalized for the impact of a shock beyond its control. The fiscal support promised by the Prime Minister, if handled well, could indeed prevent a wave of bankruptcies. But even government generosity could have some gaps. The banking sector needs to play a role as well. With clarity on how to operate, it can.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Recommended For You

Trending Stocks

×
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout