Wednesday, November 01, 2017
Catch22 of private investment : The vicious circle of PSB NPAs due to private sector borrowings dampening credit off-take
The nearly three-and-a-half-year-old Modi government is facing a key problem and a challenge. Despite increased public investment and spending, there has not been the expected and desired increase in private investment. Finance Minister Arun Jaitley at the press conference on Tuesday (October 23) has finally explained the problem and the government’s solution. The problem is that private investment is tied to non-performing assets (NPAs) of public sector banks (PSBs). Apart from creating the mechanism to sort out the NPAs through the insolvency law, the government has announced recapitalisation of the PSBs to the extent of Rs 2.11 lakh crore. (In 2015, the government had reckoned Rs 1.8 lakh crore as the recapitalisation requirement of the PSBs till 2018-19. Recapitalisation of the PSBs is a recurrent measure with all the governments.) It is also a measure to meet Basel III norms of capital adequacy and to avoid the stressed assets dilemma.
Mr Jaitley explained that recapitalisation is expected to ease the pressure on the PSB balance-sheets arising out of the NPAs, and that credit off-take will increase, which indirectly would mean an increase in private investment. The loop is quite clear. Private investment takes off through institutional borrowing, and it is recognised that private investors will have to fall back on PSBs to be able to do so. The banking sector is not yet wide and diversified enough, and private sector banks have confined themselves to the relatively safer segment of personal loans. They have not ventured into financing large commercial ventures, including those in the infrastructural sector. There are other sources of borrowing for private investors, including external commercial borrowings (ECBs) and domestic market borrowings.
But there is a catch here. Mr Jaitley acknowledged that the NPAs arose because of indiscriminate lending by the PSBs during the United Progressive Alliance (UPA) second term to the private investors. He has of course restrained himself from blaming the “crony capitalism” of the previous government as the root of NPAs crisis. He seems to understand that the problem is a little more complicated than that. There may have been instances of corporate houses with political connections accessing huge bank loans, but there are a lot many genuine cases where the borrowers were bogged down in matters like environmental clearances and economic slowdown which made their bank borrowings a liability. There is also the issue of private investments leading to excess capacities. This is one of the reasons for the sluggishness in the investment climate.
The government hopes that this time round, the PSBs would lend more prudently, and the finance ministry officials have made it clear that those PSBs which had been prudent would be preferred in the recapitalisation exercise.
Can the government get out of the Catch22 situation where credit off-take is linked to private investment, and where fluctuations in investment climate would either lead to NPAs or to slump in credit off-take? It seems that the policy-makers are not willing to look the problem in the eye. The government is rightly spending on infrastructure, but the private sector too is a big partner in this. For example, in the ambitious road building Bharat Mala Programme (BMP), Rs. 2.09 lakh crore is to be raised by the government as debt from the market, Rs. 1.06 lakh crore to be mopped up from private investors through the public-private partnership (PPP) route and Rs 2.19 lakh crore will come from the Central Road Fund (CRF) and Toll-Operate-Maintain-Transfer (ToT) model and toll collections of the National Highway Authority of India (NHAI). The actual budgetary support will be only Rs.0.59 lakh crore.
Ideally, there should have been a division of labour, where public investment would take care of the funding requirements of infrastructure and the private sector would invest in those ventures which will make use of the infrastructure to create a value-added chain. If both public and private investment is focused on infrastructure, which has huge dividends for the private sector, then the other sectors of the economy are nearly starved of investments. The report, “Private Corporate Investment: Growth in 2016-17 and Prospects for 2017-18”, which is part of the Reserve Bank of India’s September 2017 monthly bulletin shows that 70 per cent of the funds sanctioned in 2016-17 were in infrastructure, of which 45 per cent was the share of the power sector. The share of investment in textiles is at 4 per cent, that of hospitals and health services is 1.1 per cent, and hotels and restaurants 0.8 per cent.
The report also shows that institutionally assisted projects between 2012-13 to 2016-17 are concentrated in Gujarat (13 per cent), Odisha (13 per cent), Maharashtra (12 per cent), Andhra Pradesh (7 per cent), Chhattisgarh (6 per cent), Madhya Pradesh (6 per cent), Karnataka (5 per cent).
It is apparent that there is a mismanagement of investment and that it is not spread out well enough to generate both jobs and consumption. If there are adequate roads and abundance of power, but if there are not enough people and enough projects who can make use of these infrastructural facilities, then the excessive private investment in infrastructure needs to be assessed. Right now, the GDP growth rates look respectable, according to the RBI, because of public and household expenditures. It may not be sustained for too long and it is likely to have inflationary effects.
The market should ideally influence intelligent investment decisions. But data shows that private investment decisions are not following the intelligent pathway. If the government eases the stressed assets of PSBs through recapitalisation, private investment through credit offtake could flow into the safer channels of infrastructure, while other segments of the economy with potential for growth, would be starved of much needed investment.
There is other basic question: Where do the funds come from if both government and private sector raid the same sources – the banks, the markets. Earlier, there was the concern that government raising funds would leave little for private sector. This issue has been relegated into the background because private investment is dovetailing into the public in the infrastructural sector. There is an uneven distribution of investment in the economy.
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