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Fear of bankruptcy, liquidation

India has badly needed a bankruptcy law. And the government of the day needs to be complimented for bringing it about. Along with demonetisation and GST, the bankruptcy code represents three singularly welcome, needed reforms. 

On whether DeMon was a success or otherwise, the jury is still out. But the message that has gone out loud and clear is that the government means business and is keen to paralyse black money hoarders. GST may not have turned out to be the manna that it was originally touted to be, but here again the intent and the commitment is exemplary. 

The other major reform relates to the cleaning up of the balance sheets of major commercial banks dominated by the public sector. The rockstar RBI Governor Raghuram Rajan initiated the first steps. He directed banks to tighten up their provisions for NPAs. Suddenly, India witnessed the spectacle of PSU banks departing from the earlier practice of dressing up their accounts to making huge provisions for doubtful assets. This was also facilitated by inducting renowned finance specialists from outside the public sector banks to head these.  Quite a few influential politicians made a noise, but it ended up staying that way: noise. 

The UPA government in its last two years was seriously concerned with several large projects getting stuck. P Chidambaram used to famously lament on how projects worth 

Rs 700,000 crore and more remained non-starters. With the 2014 elections approaching, the government threw prudential norms to winds and directed banks to be liberal in lending. The resulting profligacy saddled the banks with massive non-performing assets.

Arun Jaitley and company have been pursuing with single minded vigour the cleaning up of bank balance sheets. As on March 2016 NPAs of banks were Rs 6.12 lakh crore. The Insolvency and Bankruptcy Code 2016 was enacted to force several large borrowers to pay up principal and interest accumulated overdue loans or face bankruptcy. There was a new categorisation of borrowers as wilful defaulters. In November 2016 IE  pointed to ten large business houses with bank debts of Rs 500,000 crore required to sell assets worth Rs 200,000 crore. 

As at the end of 2016-17 total outstanding loans by wilful defaulters was estimated at Rs 92,376 crore. Of this, the two large state-owned banks, ie. State Bank of India and PNB, accounted for Rs 37,382 crore; SBI topped with Rs 25,104 crore and PNB Rs 12,278 crore. 

The threat of bankruptcy has induced the Essar Group to sell its Essar Oil Refinery at Vadinar, Gujarat, to the Rosneft-led consortium of Russia, valued around Rs 86,000 crore. Such a drastic step would help the recovery of sticky loans by the public sector banks. This should be welcome for the public sector banks that approach government regularly for capital infusion.

Other large business groups that are on the line for such liquidation of assets/bankruptcy include Reliance Anil Dhirubhai Ambani group, Adani, Jaypee group, GMR, Lanco, Videocon and GVK.

In the changing situation corporates can be expected to opt for more rational debt: equity ratio and also to be more careful in assessing the viability of their investments. 

Old habits die hard: habituated to acquire assets in a sheltered economy, business houses routinely rushed to invest in sectors not related to their core competency. Sadly this is so despite bitten hard earlier. We cite the instance of Videocon, known for its strengths in consumer products, rushing to set up a 1000 MW power plant at Ennore and giving it up several years later.  Undaunted it continued to opt for projects in infrastructure in which it had little exposure.


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