Arun Jaitley blaming big borrowers for NPA hides a bit of frustration, but solution isn’t far to seek

Finance Minister Arun Jaitley wasn’t revealing a state secret when he said it was the big borrowers who were at the core of the festering problem of non-performing assets (NPA), euphemism for bad debts estimated at a whopping 14 percent of the gross loan portfolio of public sector banks (PSB).  While retail lending and home loans are safe bets for financiers, big ticket lending cannot be wished away given the fact that infrastructure projects among others call for big ticket investments.  And it is such projects including roads, power and steel that are facing rough weather, and in turn passing on their sickness to the banking sector in what is known as contagion effect. So, Jaitley was being incomplete when he blamed big ticket borrowers for the malaise of NPA.  Perhaps, he was expressing his frustration at being unable to do something more substantial to arrest and stop the problem from taking an ugly turn beyond putting in a place an admittedly much faster and purposeful insolvency and bankruptcy code 2015. [caption id=“attachment_3899127” align=“alignleft” width=“380”]  Union finance minister Arun Jaitley. PTI[/caption] The Enforcement Directorate has told a London Court that bulk of the self-aggrandizement done to the tune of Rs 6,000 crore by the fugitive Vijay Mallya was through the oldest, tried and tested route—diversion of funds through shell companies—to prove the point why the UK should not provide him sanctuary and instead deport him to India for serious economic offences trial.  One hopes the London court and the UK government see the Indian viewpoint and do not encourage the smug and self-fulfilling notion that London is the safest luxury resort for fugitives. But then the government knew all along that shell companies were the simplest route to prosperity through plunders just as it knew that big ticket borrowers were more prone to defaulting on their commitments.  To the NDA II government’s credit it must be conceded that it has taken the following two steps to strike at shell companies: 1) Only a fortnight ago, it froze the bank accounts of some 2,00,000 shell companies suspected of indulging in loot, plunder and illegal activities; and 2) Providing in the Companies Act the power to the government to limit layering of subsidiaries to stop the devious practice of subsidiary of a subsidiary and subsidiary of a subsidiary’s subsidiary and so on in a manner of wheel within wheel to hide and frustrate identity of real beneficiaries.  This power should not be allowed to remain a paper tiger or a scare crow.  It must be used to telling effect which would send a chilling and stern message that public and shareholders’ funds cannot be diverted through labyrinthine layers of subsidiaries with the ultimate subsidiaries vanishing into distant Camay and British Virgin Islands as well as the infamous Swiss banks. More should be done urgently. Some of the possible solutions to arrest NPA are: 3) Denying bank credit to corporate borrowers especially listed companies.  This is already a practice in advanced economies.  We must take a leaf out of them and call upon listed companies to look to the bond market for its borrowing requirements.  A vibrant and transparent bond market ensures that crooks are punished with high yields and junk bond status.  Future funding becomes difficult for those who misuse and divert the funds mobilized through issuance of bonds whereas bank finance lulls them into a smug belief that they can get away with a slap on their wrists in the form of repeated rescheduling going under the facile name Corporate Debt Restructuring (CDR).  Big corporates already issue commercial papers to mobilize short term working capital funds.  They must be asked to similarly mobilize long term funds through bonds; and 4) Taking a leaf out of Islamic banking overcoming a blanket Islam phobia for a while.  A good feature of Islamic banking is asset-based financing in the form of lease financing.  Islamic banks do not give blanket loans but instead identify the desired and required machinery in close touch with their clients.  Thereafter they buy it for him and let him use it so that he can repay with the money earned through user of such assets.  This is the best way to prevent diversion of funds.