TBS and Economic growth in India

TBS stands for the ‘Twin Balance Sheet’ problem. Last night, I read the full chapter 4 of the Economic Survey of the GoI that deals with it. IT is a good compilation of known facts. It recommends Public Asset Reconstruction Agency – PARA vs. Private Asset Reconstruction Companies – PARC. The new Deputy Governor of RBI – I read the speech – wants PAMC and NAMC.

In a mailing group I am part of, there is a discussion going on, on this topic. Someone forwarded this article. If you had not read Chapter 4 of the Economic Survey, then this is a useful article to go through. The title of the article is too grandiose. The substance does not do justice though useful.

My good friend Niranjan had written a column a year ago on this topic. I am unable to locate the link. But, he had mentioned the following:

The Banks Board Bureau should create a model contract for pricing of bad loans, and that this contract should be discussed with (of not cleared by) RBI, CBI, the Supreme Court and opposition politicians, so that individual bankers do not face the heat when they take a haircut on loan values.

That is the key.: vigilance, opposition parties, etc.  Also, the Government ought to be be prepared  (homework, I mean) for what they might ask and what you can yield to show them some victory too.

Some people who are responsible to fix this  – PM, FM, RBI Governor – must set ego aside and look at the task that need to be done to fix the issue.

It might mean reaching out to many on one’s own initiative and being prepared for initial scorn and rebuff. Swallow it and go back.

Once fixed, generally share credit too. Feasible? Realistic?? I do not know.

But, worth keeping on banging the table on the interpersonal and political processes now.

Recap facts from Economic Survey:

(a) mere 50 companies accounting for 71 percent of the debt owed by IC1 debtors. On average, these 50 companies owe Rs 20,000 crores in debt, with 10 companies owing more than Rs 40,000 crores apiece.

(b) about 33 of the top 100 stressed debtors would need debt reductions of less than 50 percent, 10 would need reductions of 51-75 percent, and no less than 57 would need reductions of 75 percent or more.

(c) Starting in the second half of 2016, however, a significant proportion of the increases in NPAs – four-fifths of the slippages during the second quarter – came from mid-size and MSMEs, as smaller companies that had been suffering from poor sales and profitability for a number of years struggled to remain current on their debts. This trend is likely to continue into 2017.

(d) Stress has also expanded to the telecom sector, where interest coverage ratios have deteriorated as new entry has increased competition, prompting a major round of price-cutting. In short, stress on the corporate sector is not only deepening; it is also widening. (May be, Mukesh Ambani should foot the bill too!)

Of course, other information on capital formation in the private sector and on loan growth to SMEs are well known and data are available easily. I am not repeating them here.

This is where the CSO numbers – had they managed to give us the full history (time series) for the new base year, then we can verify if 7% growth rates are ‘correct’ amidst such poor credit offtake and capital formation. Historical time series and patterns will tell us if the current numbers are within the realm of feasibility.

One has to go through the document that they put out in 2015 explaining their  methodology:

ACCOUNTS (BASE YEAR 2011-12)” released in June 2015. Pl. go through Sections 6.1 and 6.2.

It is bewildering and much of it relies on ASI (Annual Survey of Industries), WPI and State-level data. To the extent that these are not updated regularly, assumptions will be used based on base-year ratios, etc. So, the true economic growth is somewhere in the
ether space to be divined!

So, in a sense, by printing 7% + numbers, they might have even reduced the urgency of the problem! Plus, to the best of my knowledge, questions on the use of MCA database and the inferences being drawn from there have not been resolved.

I am not talking about the 3Q2016-17. From the year 2011-12, economic growth has been overstated. That is my view, especially during UPA years 2012-13 and 2013-14. If interested, please read the two discussion papers I put out on the topic. You can find them here and here. I was pleased to note that a working paper from NIPFP echoed some of the recommendations I had made, especially in Part II, for the cloud of suspicion over CSO estimates to lift.

The GDP growth overstatement That actually is lessening the seriousness and the gravity of the problem.

The RBI Deputy Governor – Viral Acharya – has done a very good thing by putting the issue back on the table. In fact, he must champion it and reach out to all the stakeholders – including politicians, ruling party thought leaders, etc., and help manage the political process involved. I do not know if I am being naive. But, hey, what the hell? This is a blog post. Seriously, change agents must not leave it to others to finish the job.

[Indeed, that is where some of the great cricketers scored over Sachin Tendulkar. Except on the rare occasion, he did not finish the job. Think Chepauk in 1999]

One thought on “TBS and Economic growth in India

  1. Model contract is not a bad idea actually. RBI’s different schemes have only allowed the bank to push back on the NPL problems.

    I think it will soon get interesting as bad loans will need to recognised. The PSU banks are largely now incapable of assessing risk for any number of reasons. The private banks are not too smart either except 3 or 4. I am pretty pessimistic … but fear my assessment may be actually cheerful.


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