Many of us in India become inured to a laxity in standards and to the implementation of laws. There may be good reasons for targeting one of these for a start, and that is delayed payments. These are broadly tolerated by citizens, farmers, corporates, small businesses, and government agencies. Perhaps this is because payment delays are merely one among several instances we encounter of mediocre standards, indifferent quality, or shoddy performance. Delayed payments are the inception of process flow problems that lead to non-performing assets (NPAs). Perhaps delays in cash flows are a fundamental flaw in our processes that we need to fix as a root cause that drives much else, to begin to address a gamut of inadequacies.
To see why, consider delays in government payments. Central and state government payments are often delayed, apparently even more than in the private sector. Even government payments related to high priority IT systems, for instance, are notoriously delayed. Major IT companies complain of losing money on large projects for this reason. Nasscom estimated a couple of years ago that government dues to the IT industry could be more than Rs 5,000 crore.
Some factors that render domestic projects attractive to the IT industry are the large domestic IT market, projects of significant size from state and central governments, and slowing exports over the last several years. The disincentives, however, are lower margins, long lead times for government contracts, payment delays, and a history of disputed payments and litigation. Also, IT majors complain that government processes often don’t accommodate changes in the terms of contracts when there are changes in the scope of projects. This is why IT companies are averse to domestic government projects.
Quite apart from these opportunity costs, delayed payments create serious cash flow problems for the economy, with outstandings running typically for many months, and sometimes for years. While the instances above are about the IT industry, there are similar problems in other sectors as well. In the construction industry, for example, estimates of private contractors’ dues held up by delays including disputes range from Rs 1 trillion to Rs 3 trillion.
While some bank NPAs undoubtedly result from fraud and malfeasance (which are outside the scope of this article), disruptions in cash flows in commercially sound projects can result in the creation of NPAs. This aspect has to be addressed as a precursor to stressed assets in resolving NPAs, as is evident in considering the problems of power generating companies.
A Ministry of Power portal (http://www.praapti.in/) shows that overdue payments from electricity distributors to power generating companies at the end of January 2019 amounted to Rs 28,504 crore. Meanwhile, in the Supreme Court, 34 power generating companies with NPAs of Rs 1.4 trillion were battling an RBI Circular of February 12, 2018, that consigned their entire investment of double the NPA amount (Rs 3 trillion) to bankruptcy proceedings under the Insolvency and Bankruptcy Code (IBC). The reason was that their dues had not been resolved within the RBI-mandated 180 days by August 2018. The RBI insisted on bankruptcy as a time-bound consequence, regardless of the cause of default. By contrast, the Ministry of Power and the supplicants objected to the RBI Circular, attributing loan stress in several cases to factors beyond the borrowers’ control. These factors included reasons such as payment delays by state distributors, problems in the supply of coal, or in some cases, because consortiums of lenders were close to restructuring loans, whereas declaring bankruptcy would not resolve the underlying causes.
A number of bankers suggested that the 180-day rule for bankruptcy in the RBI Circular was impractical. Major banks consider restructuring as the appropriate solution when defaults are caused by factors outside the borrowers’ control, such as delayed payments from state electricity boards or by government agencies, state government overdues, or major adverse changes such as the unexpected imposition of duties by supplier countries on coal.
The Supreme Court quashed the RBI Circular of February 2018 on April 2, 2019. This will likely pave the way for more constructive outcomes for many of these projects, provided the RBI and the banks follow through with feasible restructuring. The alternative of selling stalled projects that were unworkable because of reasons such as there being no fuel supply or power purchase agreement, or overdue payments by customers (state or central agencies) were outstanding, if indeed buyers could be found, would hardly solve these problems. The projects would remain stalled or unproductive until the underlying inadequacies were made good, whether by providing fuel, power purchase agreements, collecting overdue payments, or enabling realistic tariffs to yield viable margins. Until these deficiencies are made good, the problems will remain.
Popular opinion, however, seems to favour “selling off bankrupt projects” regardless of extenuating circumstances, even when owners have no control over them, although selling them will not rectify the conditions that created the default. This approach of attempting to sell off projects to get rid of problems without addressing the underlying issues for otherwise sound projects is best abandoned. To be flip, it’s like an “Off with his head!” approach.
Standards for on-time payments are the real requirement, with penalties, e.g., double the SBI rate, enforced strictly for non-performance. Central and state governments need to take the lead on this as an essential aspect of governance. These difficult steps will be a real bear, but are necessary if we are to eliminate NPAs. Is this a realistic expectation? As realistic as it is to expect to eliminate the resulting NPAs.
The RBI will need to provide regulatory oversight, instituting real-time monitoring and reporting systems, and taking prompt action as necessary. Properly design and deployed, such systems would prevent one form of ever-greening of loans at inception. Separate systems for loan renewals could be designed and deployed to prevent other aspects of ever-greening. These coordinated steps could prevent good assets from turning into NPAs.
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