Cheap finance is vital as most firms don’t have access to it and PSBs are facing asset-liability mismatches
The Union Budget set the stage for a sustainable economic recovery by resorting to a calibrated expansionary fiscal stance that accelerates the movement towards an ‘Atmanirbhar Bharat’. The cornerstone of a self-reliant India will be a strong and vibrant domestic corporate sector and easy and affordable access to capital. The Finance Minister proposed the creation of an Asset Reconstruction Company (ARC) and a Development Financial Institution (DFI), which will go a long way in addressing the lack of adequate credit growth that has hindered fast economic recovery. With commercial credit growth lagging, the DFI should be able to kickstart a new wave of private investments to create jobs and expand the economy. From this, new infrastructural project development stands to benefit and so would fresh capacity creation in key sectors. While giving greater access to Foreign Direct Investment (FDI) is welcome, the fact remains that foreign investors have always preferred to make brown field investments over green field ones.
All along, be it before or after the economic liberalisation, project risk has always been borne by the domestic industry. This must be recognised and appreciated as attacking and vilifying the private sector will not lead us anywhere and would be detrimental to job creation and economic growth.
Accordingly, availability of easy and affordable project finance is the most critical need as most Indian businesses do not have access to low-cost or long-term capital, while Public Sector Banks (PSBs) are struggling with major asset-liability mismatches, lack of capital, deteriorating quality of assets, high regulatory costs. They are said to have virtually stopped project finance or else, the loans are prohibitively priced. Hence, two areas of the regulatory framework need to be re-examined. First, restraining banks from lending to those firms who have defaulted and even to those who are serving their debt regularly but have common promoters/directors with a defaulting entity. Given the extensive cross-holding structure in corporate India, this norm needs to be modified. A possible option could be to allow banks to take a commercial call on all such cases where inter-company dependence is below accepted risk thresholds. A revised set of procedures along these lines, which is pragmatic, practical and commercial, would make lending more efficient and capital protecting. Second is to provide a conducive post-resolution environment to those who have gone through settlement or the Insolvency and Bankruptcy Code (IBC) process after a default. While a new regime of “creditor-in-control” is required, it cannot be based on the current “debtor-in-the dock” policy.
The system offers no support to a borrower, who has settled the outstanding dues whether through a process of bankruptcy or a bilateral one-time settlement with lenders. Indian banks are literally not allowed to lend to such corporates, while foreign banks are much more pragmatic and financing of almost all insolvency and bankruptcy cases has come from the latter. On its part, the Government must help create a level playing field and, in consultation with all stakeholders, formulate a Special Non-Adversarial Procedures (SNAP) for lending to those corporates who have either gone through a bilateral one-time settlement with the lenders or the bankruptcy procedures with a recovery of not less than 75 per cent of the total borrowings. Of course, such a procedure would need a series of checks and balances to prevent unethical firms from securing undeserved debt reductions.
(The writer is a BJP MP. The views expressed are personal.)