Should Public Funds Be Invested To Buy Stressed Assets In The Absence Of Solid Data?
By Ashwini Agarwal
About the Author
Why are banks being forced to take massive haircuts, sometimes up to 70 percent, on their stressed assets? It is because the companies they lent to have been stripped bare by unscrupulous entrepreneurs in most cases. These dishonest businessmen have siphoned off money through various means and have left little for recovery. In other cases, the cost of manufacturing was so high and the returns so low that the companies could not come out of the red even after many years of existence. It is nearly impossible to revive such companies and unlike banks, no prudent entrepreneur would be willing to throw good money after bad. The AMCs buy them at steep discounts just to sell individual assets and recover their money, with profit, of course.
Banks have reportedly put Rs 40000 crore worth of bad loans for sale to AMCs in the first half of this financial year after it was clear that delays under the IBC would make the resolution a time-consuming and costly affair. There was also the chance that if and when the resolution happened, the amount recovered (given the quantum of assets of the defaulting companies) would not be much more than what the AMCs would pay, even after the steep discount. Hence, the government has preferred to have them collect money now rather than wait interminably for the resolution.
The steep discounts on stressed assets in India are largely due to the fact that the companies going under the gavel are mostly gone cases - beyond the realm of revival, sucked dry of funds and stripped of valuable assets by dishonest promoters. As no reliable and collated data exists on the number of companies purchased by the AMCs or others and the way they shaped up after the sale, it is very difficult to say whether those who bought such assets really made a profit. They might have, because of the steep discounts at which they purchased them, but that does mean that there exists a lucrative market for such stressed assets and that windfall profits can be made.
As of now, the first requirement is to collect data on all sales of such stressed assets right down to the final disposal by the AMCs. Of course, there are some companies that were stressed due to mismanagement and these can hopefully be turned around under new management. But then the discounts for these companies would generally be much less. Hence, before committing public funds in buying out these stressed assets (as suggested by some experts), the market should be allowed to evolve and data must be obtained and collated. Otherwise, the National Pension System, the Employees Provident Fund and other funds would end up making citizens and workers poorer by taking unnecessary risks.
