ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

C P ChandrasekharSubscribe to C P Chandrasekhar

Revisiting the NBFC Crisis

Even while the effort to resolve the crisis resulting from non-performing assets in the banking sector was underway, India’s financial sector was overwhelmed by failures of large non-banking financial companies. In the discussion that followed the collapse of these NBFCs, the emphasis has been on the absence of due diligence, poor financial management and downright fraud. The environment these firms found themselves in did encourage such tendencies, but there were structural reasons as to why these institutions accumulated bad assets, and these reasons are often ignored.

Betting on Animal Spirits

Budget 2019–20 is more concerned with getting private finance for investment, especially in infrastructure, rather than with finding ways to finance much needed state action to address slowing growth and welfare shortfalls. However, even that stance does not free it from the neo-liberal fiscal bind it finds itself in.

A Rate Cut That Failed to Please

The decision of the United States Federal Reserve to cut short its cycle of interest rate increases and reduce rates, while announcing a halt to its quantitative tightening programme, is likely to restore an environment of excess and cheap liquidity. While justified as a means to strengthen the US recovery, this move would in all probability deliver increased financial speculation rather than higher growth. If that triggers another financial boom–bust cycle, slow growth could be followed by another deep recession.

Bad Debt Resolution Hits Judicial Roadblock

With the Supreme Court having declared ultra vires the Reserve Bank of India circular directing banks to pursue bad debt resolution at any cost, the process of making banks alone pay for all-round errors has come to an end. The Court has required the government to specifically authorise each resolution exercise and not delegate blanket authority to theRBI. This would matter in cases such as in the power sector where a misplaced privatisation policy explains the non-performing assets, which the government would now have to take into account. The Court’s order also makes it difficult for theRBI to pretend that it had no role in the generation of theNPAs.

Forbearance over Default

In a move ostensibly aimed at helping micro, small and medium enterprises hurt by demonetisation and the goods and services tax regime, and burdened with distressed debt, the Reserve Bank of India acceded to the demands that a lenient regime of debt restructuring should be put in place. However, the evidence suggests that this would not go very far in helping the units in this large sector. This gives rise to the suspicion that the real intent of the move is to open the door to a return to a regime wherein bad debt, resulting from default on debt service by large corporate borrowers, is restructured at the cost of the taxpayer.

Non-performing Power Sector Assets

Desperate attempts to prevent liquidation of power sector assets in companies that are defaulters point to a deeper crisis afflicting neo-liberal growth. A sector that was plagued by shortages was opened up to private participation, leading to rapid expansion in the expectation of large profits from liberalised prices. Public sector banks were called upon to finance that expansion with the government being complicit. Now, however, firms find themselves trapped between inadequate demand at prevailing prices and rising costs that precipitate default.

Lucrative Defaults by Hungry Corporates

The implementation of the Insolvency and Bankruptcy Code, 2016 has led to aggressive competition to acquire firms that have been subjected to the resolution process. This suggests that the default that required the creditors to bring these firms to the National Company Law Tribunal was not due to poor fundamentals. Moreover, the decision of the original promoters to try and enter the fray as bidders for defaulting firms indicates that they too do not see the firms and the activities they are engaged in as unviable. Yet, there is much pressure on the government to favour those who seek to game the system.

The Banking Conundrum

Neo-liberal banking reform was launched in the early 1990s to address the low profitability of the public banking system and the large presence of non-performing assets. It set itself the objectives of cleaning out NPAs, recapitalising the banks and modifying banking practices to restore profitability and drastically reduce NPA volumes. This did initially have some effect. However, while the NPA ratio fell between the early 1990s and the mid-2000s, it has risen sharply since then. Moreover, while earlier priority and non-priority loans contributed equally to total NPAs, more recently, large non-priority loans to the corporate sector account for the bulk of NPAs. An analysis of these features reveals that these trends are indicative of the failure of neo-liberal banking reform in India.

In a Macroeconomic Bind

Despite it being the government’s last full budget before the general elections in 2019, the finance minister, constrained by his self-imposed fiscal deficit targets, settled for rhetoric and promises that were not backed with allocations. This frozen macroeconomic policy has foreclosed all options to adopt proactive measures that could make a difference to those who need support. Yet, the financial interests he wants to impress also seem disappointed.

Weak Note of Caution on Unconventional Monetary Policies

The prolonged deployment of “unconventional” monetary policy responses that began in reaction to the financial crisis of 2008, especially “quantitative easing,” set off speculative investments and fuelled asset bubbles. Since they cannot allow the new bubbles to give in, policymakers must persist with decisions that inflate asset prices. By doing so, they end up sitting one more bubble on the previous one. The probability that one or both may burst has only increased.

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