Economic Survey 2016-17 stressed on the need to establish a centralised Public Sector Asset Rehabilitation Agency (PARA) in view of rising bank NPAs and declining credit growth.
Economic Survey 2016-17 stressed on the need to establish a centralised Public Sector Asset Rehabilitation Agency (PARA) in view of rising bank NPAs and declining credit growth. According to the Economic Survey The agency could take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt.
What is PARA?
The Public Sector Asset Rehabilitation Agency or PARA will be an independent entity that will identify the largest and most vexatious NPA accounts held by banks, and then buy these out from them. By consolidating problem accounts across banks, the PARA is expected to solve two problems. One, it can effect speedier settlements with borrowers by cutting out individual banks. Two, as a single large lender, it can drive a better bargain with borrowers and take more stringent enforcement action against them. PARA is expected to raise capital for its buyouts by issuing government securities, tapping the capital markets or receiving a capital infusion from the RBI.
Need for PARA?
Asset Reconstruction Companies (ARCs) have not been successful either in resolving bad debts, though international experience (especially that of East Asian economies) shows that a professionally run central agency with the government backing could overcome the coordination and political issues that have impeded progress over the past eight years.
The stressed debt is heavily concentrated in large companies. Concentration creates an opportunity, because TBS could be overcome by solving a relatively small number of cases. But it presents an even bigger challenge, because large cases are inherently difficult to resolve.
Cash flows in the large stressed companies have been deteriorating over the past few years, to the point where debt reductions of more than 50 percent will often be needed to restore viability. The only alternative would be to convert debt to equity, take over the companies, and then sell them at a loss.
large debtors have many creditors, with different interests. If PSU banks grant large debt reductions, this could attract the attention of the investigative
agencies. But taking over large companies will be politically difficult, as well.
Since banks can’t resolve the big cases, they have simply refinanced the debtors, effectively “kicking the problems down the road”. Delay is also costly for the economy, because impaired banks are scaling back their credit, while stressed companies are cutting their investments.