A total amount of Rs 7.15-8.15 trillion has to come from a financing ecosystem consisting of banks, corporates, distressed asset investors and possibly the government. To put some context to the size of the requirement, the total FDI in FY18 was $44.8 billion, and this was directed mostly at profit making or high growth companies, not distressed ones.
Attracting a large amount from global institutions — that too for distressed-asset investing when globally fixed-income yield is increasing — has added challenges. A pure alternative investment fund of distressed assets may not attract a lot of conservative investors such as global pension funds and sovereign funds. Distressed assets being riskier, only investors with high risk appetite invest in them. Such investors, usually a PE fund or a hedge fund, would expect at least a 15-20 per cent return per annum over the 12-36 months.
To attract such investors, some assets need to be sold by banks at a steep discount. Other than a couple of prized assets, in most resolutions thus far, the lender has had to take a 70-90 per cent haircut. This may mean a further loss of Rs 2-4 trillion for banks and a commensurate equity requirement. An alternative approach may be considered, where the institutional investor in the fund may have its units partially guaranteed by the government. Immediately, the universe of investors that can invest will expand and their returns expectations can come down. This is unlikely to impact the fiscal math of the government.
Any bad debt solution should appreciate that a host of companies that are non-viable need to be liquidated. A decision framework to identify companies that must be liquidated may be part of the solution. Distressed companies may be divided into two categories — utilities and non-utilities. To the extent utilities — such as road, power plants and the like — are social goods, these may be placed out of the ambit of liquidation. For them revival with financing support, with or without the existing promoters, may be considered.
Non-utility companies need to be tested for their viability. Such a company, which might have a high proportion of financial assets such as receivables, investments or loans and advances to subsidies, may call for a higher haircut on debt as it enhances the complexity in turning around the company. A company with solid plants and machinery associated with access to raw materials/commodities may be ripe for a turnaround. Development of a decision framework may help banks get a fix on the bad asset disposal mechanism quickly. The benefits will far outweigh any theoretical shortcoming of the framework.
Many years have passed in identifying the problem and coming up with dispensations in the hope that they will solve the problem — only for the dispensations to be reversed later. The bankruptcy code is a much needed solution and with time, it can become an asset for the Indian business environment. That said, banking just on it to solve all the problems would be somewhat optimistic. Dedicated, time bound, structured initiatives are required to solve the bad debt problem. Sashakt is a good initiative. It could be strengthened by more implementation details. Let’s fortify it as a first step.
The author is a visiting faculty of finance at IIM Calcutta