Stop Playing a Test as T-20

Business Standard 30th July 2020 Save

Context: The tussle between the Reserve bank of India (RBI) and the Government of India (GoI) while tackling the economic challenges acts as the root cause of several legacy issues related to Non-performing Assets.

Challenges to controlling Non-Performing Assets in India

Fiscal Dominance of the GoI: which relates to the inability of the GoI to contain its fiscal spending drives.:

- - For E.g. Because the government has limited funds, it is reluctant to recapitalise its public sector banks while asking the RBI to relax regulations so that banks can avoid loss recognition.
  - Government overspends as a rule: leaving itself with little spending power in emergencies like the current one.

Sub-optimal Fiscal Operations: Over-indebted companies kept alive by regular fund infusions from banks that make other healthy corporations cash-starved.

The continued survival of half-dead zombie corporations accounts for poor economic growth.

For E.g. Japan’s poor performance in 1990 and Europe’s slow economic growth post-financial crisis can be attributed to this.

Structural issues concerning differences between GoI and central banks.

Fiscal Spending vs Fiscal Stability: GoI’s power to overrule RBI and unwillingness to take some of the RBI’s advice.

Rising NPA’s in small and medium firms as the government pushed lending to these firms even before clearing the stalled infrastructure projects of previous regimes.

Way Forward

Setting up Asset Management Companies (AMCs): which will also release the burden of the National Company Law Tribunal:

Private sector AMCs: for corporations that only need debt restructuring.
National AMCs: for assets like surplus power plants that will have to be held off the market until the demand is adequate.