The news of Tata Steel acquiring Bhushan Steel has come as a relief to the miserable banking sector of the country, reeling as it does under the pressure of non-performing assets or irrecoverable (bad) loans. A strong private company buying up a weak or sick one saves the taxpayer from being burdened with the surplus needed by the state for reconstruction of loans disbursed by public sector banks — provided the acquisition includes owning up the liabilities of the weaker company. This story also raises the hope that the Insolvency and Bankruptcy Code Act, 2016, will yield the kind of results the law was made for. As an article published by us on 21 May says, “… the RBI referred 12 cases to the IBC totalling about 25% of the gross NPAs in the banking system. According to banking industry sources, 28 more accounts were referred to the IBC. In most of these cases, the process is underway.” For all the flak that the Narendra Modi government has received for not reforming the structures of the economy enough, it must be said this was a judicious way of dealing with the issue of NPA. Of course, there is hardly enough tax-consciousness in the country to make people question the government and all political parties with the potential to form governments whether they have the right to rob Peter to pay Paul on a host of other domains. The masses get worked up only in cases such as those of Vijay Mallya, Nirav Modi, Mehul Choksi, et al when some opposition party raises hue and cry over crooks fleeing with people’s money. It’s a different story altogether that the opposition may be more socialist and, thus, more callous towards the people than the government of the day.
The success of the merger-and-acquisition solution to NPA does not depend entirely on the government, though. The market should have enough players interested in buying a company with its humongous liabilities. Second, some industrialists should be ready to buy out the sick MSMEs, too. Third, National Company Law Tribunal should have enough manpower to process all the IBC applications. With the likes of Arcelor Mittal, Korea’s POSCO, Blackstone, TPG Capital, the Tata Group, Mumbai-based Shapoorji Pallonji Group, etc interested in acquisitions, the resolution of the first issue is in sight. Yet, the banks must agree to bear with up to 50% of the difference between the loan amount and actual value of the asset, which is the demand interested buyers in general are making. The second issue is tricky. While many large corporate houses might have turned cronies of the INC-led UPA government to get the loans they did not deserve, the loans to smaller companies that the banks are finding difficult to recover is a result of both inefficiency and corruption of public sector banking staff who could be bribed with a pittance. It must be noted that while the NPA under the NDA government are much higher than that under the UPA, the added amount owes largely to the interest further accrued on the older NPA, increased gross NPA and capital implications of the banks’ compulsion of dealing with bad as well as revised mortgages. The government must address the third issue promptly, as 25,000 odd cases are already pending with the NCLT. Finally, unless there is GDP growth at a tremendous pace, there will not be enough money to finance this rerouting of money.
The final frontier cannot be conquered unless the duo, Prime Minister Narendra Modi and Finance Minister (at rest) Arun Jaitley, shed the inhibition of drastic economic reforms, the primary necessity in which is correcting the banking system. Unlike other advocates of the socialist status quo, Jaitley interestingly does not take recourse to the asinine argument that private banks can be corrupt, too. Without blaming Indira Gandhi, he says privatisation of public sector banks would require constitutional amendments, in a way, conceding that this government is too politically constrained to do it. However, unless that is done, not only will every big loan to an industry, even when necessary, be followed by allegations of cronyism but also, when the loan becomes irretrievable, the money of 100% taxpayers — not just those who made the mistake of keeping deposits in the erring bank — will be used to reconstruct the NPA and save the bank. As of now, the M&A route provides relief to the citizens in a domain beyond banks, too. Air India, for example, has not declared itself insolvent or bankrupt though there is no way it can make up for the more than Rs 5,000 crore worth of annual losses. Yet, if it gets a buyer, which is given some concessions on the airline’s liabilities, our taxes will stop feeding the white elephant. Scooters India, Pawan Hans, Projects & Development India, Bridge & Roof, National Projects Construction Corporation, Engineering Projects India, Hindustan Prefab, Hospital Services Consultancy Corporation (India), ITDC hotels and all such businesses the government has no business to be in must follow suit.