The biggest ever fire sale of Indian corporate assets has begun, to tide over bad loans crisis

[IndoCarib]

‘For sale’ tags on airports, roads, ports, steel plants, cement units, refineries, corporate park, among others, are visible.

We are seeing what is effectively India Inc.’s biggest ever fire sale. It’s even bigger than the government’s planned divestment target.

The Reserve Bank of India’s (RBI) has decided to clean up the balance sheets of Indian banks, which are collectively saddled with Rs five lakh crore of bad loans, by the end of this fiscal. So, the banks have started cracking the whip on Indian companies for repayment of loans. For most affected firms and groups, this will mean they will be forced to sell prized assets to repay their ballooning debts.

We are seeing ‘for sale’ tags on airports, roads, ports, steel plants, cement units, refineries, malls, corporate parks, land banks, coal mines, oil blocks, express highways, airwaves, Formula One teams, hotels, private jets, and even status symbol corporate HQs. Substantial stakes in firms, and in some cases entire companies, are on the block.

The Hindu reviewed leading corporate houses with billion-dollar loans riding on them, and the results are startling. The top 10 business house debtors alone owe Rs 5,00,000 crore to the banks. They will be forced to sell assets worth over Rs 2,00,000 crore.

Reliance Group (Anil Ambani)

The Anil Ambani-led Reliance Group alone owes Rs 1,21,000 crore of loans to the banks and had an annual interest liability of Rs 8,299 crore against earnings before income tax of Rs 9,848 crore. Some of the group’s firms, like Reliance Infrastructure and Reliance Defence, don’t earn enough to service the interest outgo.

Assets put on sale by the Reliance Group include about 44,000 telecommunications towers (valued at Rs 22,000 crore) and optic fibre and related infrastructure (Rs 8,000 crore) from Reliance Communications (RCom), its flagship firm. Weighed down by about Rs 40,000 crore of debt, RCom has posted a loss of Rs 154 crore in FY14-15, and has continued to post losses in the first three quarters of FY 15-16, accumulating losses of over Rs 2000 crore until December 31, 2015; it is likely to end that fiscal with a net loss too. The company is valued at Rs 13,440 crore, less than a third of its total debts. However, RCom plans to reduce its debts to Rs 10,000 by selling Rs 30,000 crore of telecom assets.


Reliance Infrastructure (R-Infra) is sitting on a pile of debt of Rs 25,000 crore as of February. In November 2015, it agreed to sell a 49 per cent stake in its electricity generation, transmission and distribution business in Mumbai and adjoining areas to Canadian pension fund Public Sector Pension Investment Board (PSP Investments). The transaction is expected to reduce debt of Rs.7,000 crore attached to the distribution business. It agreed to sell its cement business to Birla Corporation for Rs 4,800 crore in February, and is looking to sell its entire roads portfolio, valued at Rs 9,000 crore, for which three international bidders have been short-listed. R-Infra’s EBIT stands at Rs 1,686 crore, against interest liability of Rs 1,974 crore. Its market capitalisation at Rs 14,476 crore is Rs 10,000 crore lower than its debt. By sale, of cement, road and the Mumbai power distribution businesses, the company expects to be debt free on standalone basis by the end of this fiscal.

Reliance Capital, with debt of Rs 24,000 crore has sold stakes, in phases, in its mutual fund and life insurance businesses to Nippon Life Insurance for Rs 3,461 crore to allow the latter to increase its stake to 49 per cent in each of the businesses. It further plans to raise another Rs 4,000 crore by the end of 2016-17 by selling non-core assets, including proprietary investment book and by inducting a partner in its general insurance business. Reliance Capital’s debt includes its lending portfolio – commercial lending and housing finance- of about Rs 18,000 crore and claims to have a debt-equity ratio of 1.77, the lowest in the industry, as of December 31, 2015.

Mr Ambani is also looking to exit the media and entertainment businesses, under Reliance Broadcast Network Ltd (RBNL), for Rs 1,500 –Rs 2,000 crore.

His foray into defence — the recently-acquired Pipavav Defence & Offshore Engineering, rechristened Reliance Defence — is sitting on debt of Rs 6,800 crore against its current market capitalisation of Rs 4,895 crore. The loss-making company with negative EBIT of Rs 306 crore has an interest liability of Rs 347 crore a year.

Ruia’s Essar group (Shashi and Ravi Ruia)

Shashi and Ravi Ruia’s Essar group has gross debt of Rs 1,01,461 crore. The group is looking to sell about 50 per cent stake of its family silver, i.e., Essar Oil’s 20mtpa (million tonnes per annum) Vadinar refinery, for Rs 25,000 crore. It also plans to bring in a financial partner for its 10mtpa steel business that currently has a debt of Rs 40,000 crore; a 49 per cent stake in the steel facility will be valued at about Rs 25,000 crore. The debt-laden group is also looking to sell stake in its ports business. Essar Steel and Essar Oil each account for one-third of the group debt, and Essar Power, one-fifth.


Adani group (Gautam Adani)

The billionaire Gautam Adani’s Adani group, with Rs 96,031 crore debt, is under pressure to sell its stake in the Abbott Point coal mines, port and rail project. The Adani Group’s debt stands at Rs. 72,000 crore. Last year, Standard Chartered bank had recalled loans amounting to $2.5 billion as part of its global policy of reducing exposure in emerging markets. Global lenders have backed out from funding the $10-billion coal mine development project. State Bank of India has also declined to offer a loan despite signing an MoU to fund the group with $1 billion. An Adani spokesperson declined to offer any comments on the issue.


Jaypee group (Manoj Gaur)

Manoj Gaur’s Jaypee group’s debt is over Rs 75,000 crore. The group has agreed to sell its 20mtpa of cement assets to Kumar Birla-led Ultratech for Rs 15,900 crore. This will leave its listed entities with about 6mtpa of cement capacity, three thermal power plants, one hydropower plant, an expressway project and land parcels. It is looking to sell most of these assets at the right price, but buyers are not easy to come by. Aside from selling stake in its land parcels and the Yamuna Express Highway, the group is looking to sell its remaining cement plants for Rs 4,000 crore and its Bina thermal power plant for Rs 3,500 crore. In the last year, the group has defaulted on payment obligations worth $350 million. Analysts say its capacity to service its debt has not improved.


GMR group (GM Rao)

G.M. Rao’s GMR group was one of the first debt-ridden companies to sell off assets; it has already offloaded stake worth Rs 11,000 crore in its roads, power and coal assets in the last two years. Despite this, its total debt has actually gone up: from Rs 42,349 crore at the end of FY13 to Rs 47,738 as of March, 2015. The group is planning to raise about Rs 5,000 crore this year by selling land parcels, energy assets and stake in airport subsidiary. Last month, it announced it was selling part of a road project in Karnataka, to help reduce debt by more than Rs 1,000 crore. It also plans to sell 30 per cent of its stake in its airport arm, which is valued about Rs 10,000 crore.


Lanco group (L Madhusudhan Rao)

The Lanco group has debts of Rs 47,102 crore. It completed the sale of its Udupi plant in FY16 for Rs 6,300 crore (15 per cent of FY15 debt). Debt levels have continued to rise, up 6 per cent in FY15. The group plans to sell power assets worth Rs 25,000 crore to de-leverage its balance sheet and retire debts of about Rs 18,000 crore. It is also planning to sell a one-third stake in the Australian coal mine it acquired in 2011 for $750 million.


Videocon group (Venugopal Dhoot)

Despite the Videocon group selling its stake in its Mozambique gas fileds for Rs 15,000 crore, gross debt has continued to rise: it is up 10 per cent year-on-year to Rs 45,405 crore, while net debt has remained largely flat at Rs 39,600 crore. Last month, it sold its spectrum to Bharti Airtel for Rs 4,600 crore. “If you minus last month’s spectrum sale amount of Rs 4,600 crore which will be paid directly to the banks, then debt comes to Rs.34,000 crore. To decrease debt further, we will be liquidating assets worth Rs 5,000 crore this year so the net debt of the group will be around Rs 29,000 crore,” Videocon Industries chairman Venugopal Dhoot told The Hindu adding that out of this net debt, Rs.21,000 crore has been taken for oil and gas ventures in Brazil, Indonesia and across the globe, where the group and ita partners have discovered oil and gas reserves. So, domestic debt of around Rs 8,000 crore will be serviced.


GVK group (G.V. Krishna Reddy)

To repay some of its debt of Rs 34,000 crore, the GVK group is in talks to sell 49 per cent of its airport subsidiary, which has an enterprise value of Rs 10,000 crore. Last month, it agreed to divest its 33 per cent stake in BIAL to Fairfax India Holdings Corp for an aggregate investment of Rs 2,149 crore. The company is also exploring the possibility of bringing in equity investors into Hancock Infrastructure Pvt Ltd, its holding company for its rail and port projects in Australia. A GVK spokesperson in reply to an e-mail query by The Hindu said, “As part of our corporate policy, we do not comment on any speculation in the media. While it's public knowledge that we are considering various options for reducing our debt, we regret we cannot respond to any of your queries.”


Reliance Industries ( Mukesh Ambani)

India’s largest debtor, Mukesh Ambani’s Reliance Industries (RIL), has a total debt of Rs 1,87,079 crore (up from Rs 62,500 crore as on March 31, 2010, mainly because of the Rs 1,50,000 crore roll-out of Reliance Jio), the biggest among all corporate houses, and the largest ever in Indian corporate history. But it’s also one of the best-rated firms in servicing its interest, so banks are happy to offer RIL loans at competitive rates. Analysts believe that huge debt may weigh down the profitability due to interest outgo and depreciation after the commercial roll-out of Reliance Jio, if it is not able to scale up quickly.

Company

Gross debt (2014-15)

Assets for sale (Rs.Cr)

Reliance Industries (Mukesh Ambani)

187070

-

Tata Group


The Tata Group, India’s largest corporate group, with over 100 companies, wants to sell its UK steel business, which came as part of the $12.9 billion acquisition by Tata Steel of Corus in 2007. Tata Steel had invested over $ 2 billion as capital expenditure in its UK steel business and it has now written down the value of its investment of $2.9 billion, meaning the value of its UK steel business is almost zero. The company’s consolidated debt was $10.7 billion on September 30, 2015, with the total long-term debt of its Europe business at about $4.3 billion.

The others

Among other corporates,

• Naveen Jindal-led Jindal Steel and Power Limited has agreed to sell a 1,000 MW power plant to his elder brother Sajjan Jindal at an enterprise value of Rs 6,500 crore and is looking to sell other assets to reduce debts of Rs 46,000 crore.


• DLF Ltd, India’s most valuable property developer, has sought expressions of interest from several top global investors to sell a 40 per cent stake in its rental assets arm as it seeks to pare debt. The rental assets arm holds about 20 million sq.ft of leased-out office space and is valued at about $2 billion,

• India's largest sugar producer Shree Renuka Sugars Ltd has declared its Brazilian unit bankrupt and has filed for protection in the country. The company plans to fully exit from the National Commodity & Derivatives Exchange (NCDEX), as part of a strategy to sell all its non-core assets to reduce debt.

• The Sahara group’s sale list is long: 86 real estate assets, a 42 per cent stake in Formula 1 team Force India, four airplanes, and its hotels: the Sahara Hotel in Mumbai, Grosvenor House, London, the New York Plaza Hotel, and The Dream New York Hotel.

• Almost all of Vijay Mallya's assets are on sale by the banks.


Quenching the fire

Despite all the desperate deleveraging, the financial stress at these groups has intensified: all of them saw further increases in debt in FY15. These debts have grown seven-fold over the past eight years and account for 12 per cent of system loans, according to Credit Suisse

As groups like Jaypee and GMR cut back on capex and sold assets, their debt and EBITDA have deteriorated further, mainly because they sold their best assets, which were contributing to as much as 70 per cent of their EBITDA. For Jaypee, Lanco, Essar, and GMR, about half their debt has already been downgraded to Default by rating agencies. For GMR and Videocon, absolute debt has continued to rise despite asset sales. Lanco’s Udipi plant sales reduced debt levels by 15 per cent, but that project contributed to 69 per cent of its FY15 EBITDA. Videocon too hasn’t seen any reduction in debt levels.

Investment advisor SP Tulsian said that when you have gangrene in your body, you need to chop off that part to survive; “Similarly, Indian firms need to sell off assets to deleverage their balance sheets or they will die sooner or later. For, banks will take control of their assets and sell them to recover dues.”

However, Morgan Stanley, the global financial services firm believes that the worst of India's corporate debt crisis seems to be over as companies are reporting positive Free Cash Flow (FCF) for only the second time in two decades.

In its Asia Insight Report tilted “India – Macro meets Micro,” Morgan Stanley said that the distress in corporate India's balance sheet is unchanged for the past four years and lists out the following problems of corporate sector:

It’s a balance sheet recession

-Corporate debt to equity is at all-time high

-The debt service ratio is at a new low. The BSE 500 index companies have about 4 times their operating income to pay interest expenses compared to around 10 times in the boom years

-Interest to sales is approaching an all-time high, hurting net margins and impeding debt serviceability.

-Excess return on capital (ROCE minus the prime lending rate) is at all-time lows and in negative territory. This means that companies are earning less on their investment than the cost of their debt.

Tulsi Tanti’s Suzlon became the first casualty of the banks' recovery drive. In 2015, it was forced to sell its largest international subsidiary, Senvion, bought for €1.4 billion euro in 2007, for around €1.1 billion. The sale helped Suzlon cut down its debt of Rs 16,500 crore to Rs 10,500 crore, and reduce its interest liability from Rs 1,600 crore to Rs 800 crore a year. More companies from indebted sectors — power, infra, steel, realty for example — will be forced to emulate Suzlon and go for rapid asset sale in the hope of staying afloat until better times.
http://www.thehindu.com/business/In...tide-over-bad-loans-crisis/article8573163.ece

 

[IndoCarib]

Modi- Ambani- Adani nexus, Really !??

Biggest ever Sale of Indian Corporate Assets in Indian History. The so called "Suit Boot Ki Sarkar" has really booted the BEHINDS of the Corporates who borrowed easy Public Money during Congress rule to buy Assets for themselves. Now the RBI has the gargantuan task of cleaning up of bad loans. And they RBi has lost credibility under Modi regime

@Jacob Martin
@takeiteasy
@Infinity
@The_Showstopper

 

[kadamba-warrior]

Modi- Ambani- Adani nexus, Really !??

Biggest ever Sale of Indian Corporate Assets in Indian History. The so called "Suit Boot Ki Sarkar" has really booted the BEHINDS of the Corporates who borrowed easy Public Money during Congress rule to buy Assets for themselves. Now the RBI has the gargantuan task of cleaning up of bad loans. And they RBi has lost credibility under Modi regime

You forgot to include the suspect-in-chief - @Ashfaq321

But then, everybody knows deep within that these are mere hit & run tactics! You throw enough muck and hope that some of it sticks. Even if none of it sticks, their target audience would have already bought their snake oil.

If that wasn't the case, you would hear Kejriwal and others come on stage and say that perhaps they were mistaken in alleging a nexus between Modi and these corporate houses.

 

[Infinity]

Modi- Ambani- Adani nexus, Really !??

Biggest ever Sale of Indian Corporate Assets in Indian History. The so called "Suit Boot Ki Sarkar" has really booted the BEHINDS of the Corporates who borrowed easy Public Money during Congress rule to buy Assets for themselves. Now the RBI has the gargantuan task of cleaning up of bad loans. And they RBi has lost credibility under Modi regime

@Jacob Martin
@takeiteasy
@Infinity
@The_Showstopper

What is the solution for India’s Rs1,00,00,00,00,00,000 bad loan problem?


Indian banks are in deep trouble.

Their pile of bad loans, or stressed assets, is close to Rs10 lakh crore ($154 billion) now, which is more than the GDP of at least 137 countries. And what’s more, it is only growing.

Stressed assets, which include non-performing assets (NPAs) and restructured loans, form some 12% of the total loans in Indian banking now.

NPAs are loans that borrowers have stopped repaying—either the principal or the interest—with slim chances of recovery. Gross NPAs among Indian banks have shot up by 135% between December 2014 (Rs2.61 lakh crore) and December 2016 (Rs6.97 lakh crore). In March 2017, the average bad loans of public-sector banks (PSBs), which account for 70% of India’s banking system, stood at 75% of their net worth. Restructured loans are those for which the banks have relaxed the terms and conditions in the hope of recovery. But then, the probability of default still remains high.

By now, the condition is so bad that for every Rs100 that they lend, Indian banks are likely to get back only Rs88.

The genesis
Trouble began in 2008 following the collapse of Lehman Brothers and the resultant global slump. Till then the Indian economy had been cruising along on a wave of optimism. Between 2006 and then, it had grown at around 9-9.5%. So, companies borrowed aggressively for expansion. When the slowdown came in 2008, it played havoc with corporate repayment abilities. Banks have turned cautious since, and by February 2017, loan growth had hit an all-time low of 3.3%.

The corporates in India account for a major portion of bad loans. The top-10 business group borrowers alone have to repay Rs5 lakh crore to banks. Some of the businessmen—Vijay Mallya, for instance—have failed to cough up the money even though they have the ability to pay, resulting in the banks declaring them wilful defaulters.

The RBI, as well as the supreme court of India, had to eventually step in to tackle the issue.

Yet, despite the steps taken by the banking regulator under its former governor, Raghuram Rajan, and his successor and current chief, Urjit Patel, nothing much has come about it.

RBI’s measures
In February 2014, the central bank introduced the joint lenders forum (JLF) which allowed multiple banks that had extended loans to a specific company to consider a collective mechanism to resolve the problem. However, the lenders seldom agreed with each other and recoveries remained dismal.

Then the RBI introduced the strategic debt restructuring (SDR) scheme in June 2015, a new version of the failed corporate debt restructuring (CDR) scheme of August 2001. This allowed banks to buy a stake in defaulting companies by converting debt into equity. However, once again, it met with little success as banks were still dependent on promoters for the resolution. Besides, finding buyers for this equity was often difficult.

A year later, in June 2016, the banking regulator introduced a scheme for sustainable structuring of stressed assets. This let banks restructure large loans where the projects were up and running. Evidently, the scope of this scheme is limited as it is applicable only to active projects.

One reason for the RBI’s measures not bearing fruit, bankers say, is the slump at the ground level that was not reflected in India’s big GDP numbers. “Bad loans are a culmination of the economy’s slowing down, stalled projects, and licences of players from some industries (iron & steel, mining, telecom) being called off,” explained N S Venkatesh, executive director at Lakshmi Vilas Bank, a private lender.

Most recently, on June 14, the central bank directed that the top 12 large borrowers, which account for 25% of the bad loans in the country, be immediately taken to bankruptcy courts. “This new move is likely to speed up things. It spells that we don’t need to coerce and coax the promoter to co-operate with us. Now, the creditors are in control and this move of showing the stick to the promoters is what was required,” a CFO of a Mumbai-based private bank explained, requesting anonymity.

Experts say that the other mechanisms failed because the central bank does not have any significant influence on promoters and shareholders of defaulting firms. “The RBI does not regulate promoters and other equity stakeholders…as a result, they cannot force resolutions on to them,” Nikhil Shah, managing director at Alvarez and Marsal, a consultancy specialising in turnarounds, told Bloomberg in March.

However, banks themselves are unable to form a consensus on a resolution process, prolonging the bad loan crisis, said Karthik Srinivasan, an analyst at credit rating firm Icra. “But with the RBI directing banks to take 12 accounts directly to the bankruptcy court, the power has now shifted from the squabbling banks to the regulator and this will hasten the process,” Srinivasan said.

Others remain cautious, though.

“The steps taken by RBI, including the recent insolvency mechanism, are in the right direction. But these are not magic wands; it is going to take some time before the crisis can be resolved,” Venkatesh said.

The solutions
The process of recovery in India is usually extremely long, sometimes taking up to 15 years. On average, India takes over four years to declare a promoter or a company insolvent, which is more than twice the time taken in China and in the US, according to the World Bank. So, Indian banks recover only 25 cents to a dollar in India, compared to 36 cents in China and 80 cents in the US.

While, the new bankruptcy law passed in May 2016 aims to shorten this time period, the framework to implement it still isn’t in place.

To solve these sticky issues, policy makers and experts have been discussing possible solutions.

One among them is the creation of a government-controlled bad bank—an entity that will hold NPAs and stressed assets of firms suggested by credit ratings firms and even private equity majors like KKR. “A bad bank might provide a way around some of the problems that have led Indian banks to favour refinancing over resolving stressed loans. For example, large corporates often have debt spread across a number of banks, making resolution difficult to coordinate. The process would be simplified if the debt of a single entity were transferred to one bad bank,” credit ratings firm Fitch said in a Feb. 24 note.

This has had its share of critics, though.

Meanwhile, re-capitalisation of state-owned lenders is important, too, considering their overwhelming domination of the industry. Equity infusion will push up assets, in the process bringing their bad loans-to-net worth proportion down from 75%. But the capital infusion requirement of government-owned banks is massive. The top PSBs in the country alone will need some Rs95,000 crore to maintain healthy financials, credit ratings firm Moody’s says.

The government’s plans are much smaller, though. In February, it announced Rs10,000 crore for this purpose under the Indradhanush plan in the next financial year.

Clearly, a way out of the woods is still out of sight

@IndoCarib

Farm loan waivers are not the same as corporate NPAs – and it’s tough to say which is worse
While both have huge monetary implications, farm loans directly come from the state budget while corporate non-performing assets have some hope of recovery.

Tamil farmers protest at national capital. Image credit: PTI Photo
Karnataka became the latest state to announce a loan waiver for farmers, saying this week that it would waive off Rs 8,165 crore worth of agricultural loans taken from co-operative banks. The move came following similar and much bigger waivers from other states including Punjab, Maharashtra and Uttar Pradesh, while demands for similar schemes are starting to echo around the country.

Not everyone is happy about the waivers: On Thursday, Union Minister Venkaiah Naidu called them a “fashion” and said they should only be used for emergencies. But the counter debate has also been strong, with one of the central arguments saying governments are hesitant to help out needy farmers, even as large companies with huge non-performing assets are being offered bailouts.

“Agriculture is indeed a state subject,” wrote analyst Devinder Sharma, “but when it comes to industry, which is also a state subject, the finance ministry has no qualms about writing-off of the massive bad debt.” Many argue that the government has given banks a free hand in lending to big corporate clients and then waived off loans after they went bad, while farmers have to resort to extreme measures such as drinking their own urine to get the government’s attention.

But are these genuine comparisons? Is the state really being partial to big business, even as it reluctantly hands out money to farmers after they started to agitate? Or are farm loans a sign of dubious credit culture, adding huge fiscal burdens on the state while encouraging people to agitate more?

Scale of the problem
That both farmers and corporate India are in financial trouble is inarguable.

The effects of demonetisation, a bumper crop and various inefficiencies within the agricultural system have led to a price collapse and pushed farmers across the country to the edge, despite good rains during last year’s monsoon. This has turned into unrest, with protests across the country, and some farmers even dying at the hands of the police in Madhya Pradesh.

Industry has an equally substantial headache. Despite efforts by the Reserve Bank of India to address the issue, banks continue to be riddled with massive amounts of non-performing assets.Till last count, there were NPAs of Rs 9 lakh crore with another Rs 2.3 lakh crore at the risk of slipping into bad debts. Some of the hardest hit are crucial sectors, including telecom, iron and steel and manufacturing industries. And the banks that gave out the loans have constantly called for bail-outs from the state. Most recently, the State Bank of India wrote to the government and asked for “immediate intervention” – meaning relaxing the terms of their loans – in the rising debt among telecom companies which has reached more than Rs 4 lakh crore, according to reports.

Aside from the scale, however, it becomes tough to genuinely equate stressed corporate assets to farm loan waivers, even though they share many aspects.

Direct vs indirect
Farm loan waivers are direct costs for the state. Corporate loans take a more circuitous route.

The impact of farm loan waivers and bad loans is vastly different on the national accounts.

“Farm loan waiver is directly coming from the fiscal budget. The burden will be borne by the respective treasury of the state government. For instance, [Maharashtra]’s fiscal impact will be double the current fiscal deficit of the state. In banks, the burden might fall on shareholder. Banks might write it off but they continue the recovery process,” economist Ajit Ranade said.

The remedial measures taken are quite different in farm loans from corporate debt. While banks have a host of legal remedies such as debt recovery tribunals and corporate debt restructuring when companies default, a farm loan waiver simply comes as a subsidy from the government.

As a result, in case of stressed corporate assets, the defaulting entity might end up losing the whole company if they don’t pay up on time even though the RBI has not been able to make much of a progress to solve the NPA problem through its slew of measures. Eventually, the burden of corporate NPAs is going to fall on the shoulders of the government which is at the helm of PSU banks who are constantly vying for more funds.

Overall costs?
It is unclear which will end up costing the government more.

A recently published paper by Credit Suisse estimated that farm loan waivers across eight states including Madhya Pradesh, Rajasthan, and Punjab would cost under Rs 2 lakh crore, with that amount spread over a few years.

“However, in our view, this would be the upper end of the fiscal cost, and the final number could be lower, and the fiscal cost may be spread over 2-4 years. [Tamil Nadu], for example, has already gone through a waiver of co-operative bank loans worth Rs 60 billion over five years; only the courts’ directive of extending it to other farmers remains,” the paper stated.

This is so because most of the waivers announced come with conditions attached and not all agricultural loans are waived off. Mostly, the interest is waived off or the loan waiver is provided to only a certain set of borrowers who are selected based on certain criteria. In the case of Maharashtra, it was decided that only marginal and small farmers who paid their loans regularly will get a waiver.

At the same time, corporate debt waivers are not as sweeping. While the banks keep demanding additional capital from the government, the current government provided only a promise of infusing a total of Rs 70,000 crore in public sector banks over a period of four years in August 2015 through the project Indradhanush. Meanwhile, these banks are also supposed to raise another Rs 1.1 lakh crore from the open market to meet their capital requirements as NPAs go through the roof.

“The Public Accounts Committee of Parliament has estimated that the total bad debt of public sector banks, known as Non-Performing Assets, stands at Rs 6.7 lakh crore. Out of this 70% belongs to the corporate whereas only 1% default is of farmers,” said Radhika Pandey, consultant at the National Institute for Public Finance and Policy.

Moral hazard
Both represent a moral hazard. Apart from the fiscal burden, any kind of loan waiver come with the burden of moral hazard that waiving off loans destroys credit culture – something that even central bank governors have warned about. Handing out waivers, this argument suggests, starts a vicious cycle of people not paying their loans in the hope of getting a waiver in the future. This further makes those who pay on time feel cheated for being responsible with their money.

The question about moral hazards come up most frequently with farm loan waivers. “I think it undermines an honest credit culture. It impacts credit discipline. It plugs incentives for future borrowers to repay. In other words, waivers engender moral hazard,” RBI Governor Urjit Patel said two days after Uttar Pradesh announced a Rs 36,000 crore loan waiver scheme.

But what about the credit culture among the corporates? An analysis by Mint of RBI data showed that only 6% of agricultural loans were deemed to be defaults while companies didn’t pay 14% of their loans.

This implies that companies fare worse than farmers in paying back their dues and the talk of credit discipline being a consideration for loan waivers might just be one sided.

“Even in the worst drought years (2015), only 7.4% of agriculture loans were stressed. But nearly a fifth of the corporate loan book was under stress despite profit margins of companies showing some improvement in 2015-16,” Aparna Iyer wrote in her column for Mint.

Different liabilities, same effect
The liabilities are not the same, but the overall effect might be the same.

Relatively speaking, farmers are dealing with a much more dire situation than corporates. Their livelihood is on the line, and even a loan waiver only comes as a temporary balm.

“In case of corporate loans, the loan is given to companies not the owners so their personal assets are rarely attached as collateral. Whereas in case of a farmer, he is supposed to pay the loan back from all resources available. Corporate loan restructuring is happening from the bank’s balance sheet,” said economist Ajit Ranade.

Ranade added that it will be unfair to assume that farmers are let off easier than companies when it comes to loan waivers. Firstly, the waivers only apply to those who took loans from banks and not moneylenders. Secondly, waivers do not provide any future assistance in generating crops or livelihood and thirdly, most of the farmers do not own land so they can’t avail a bank loan.

However, with farm loans as well as NPAs of companies, it is the banks who take the first hit and then it trickles down to the citizens. So one might debate their contents and quantity, but the fact remains that both should be anathema to a well functioning political economy.

“But a point to be noted is that the share of agriculture in bank credit has hardly grown in a decade. Bankers may have turned unfriendly towards companies of late, but they were never friends of the farmer,” Iyer wrote in her column.

 

[jetray]

Good thing,govt is going after these crony capitalist corporates. Govt has the courage to bell the cat unlike the previous govt which stood like a spineless spectator.