IT IS TIME FOR ARCs TO TAKE CONTROL OF NPAs

Post 2009, when the world had started believing that global meltdown was over and the time of recovery was nigh, Europe landed its right foot on the bear trap. Today, it seems the EU bloc will never find living easy; at least not in near future.

But I do not want to discuss the global economic scenario. You, and everyone else who reads a magazine or two every month or a newspaper or two every week knows it all. Instead, I am more interested in discussing another matter that deserves a quick thought – the rising non-performing assets (NPAs) in the Indian banking industry.

Wait! Do not brand me a pessimist. I am talking about an industry that is set to gain momentum from NPAs that are piling up in the books of banks – the asset reconstruction companies (ARCs). Yes, I want to talk about the boom that is set to bring in some resilience for the Indian ARCs, at least for those who missed the bus during the first phase of this four year-long slowdown.

For those who know little about ARCs, they are companies which thrive on bad loans of banks and other financial institutions. Their modus operandi is to buy these bad or distressed loans from the banks’ books and turn them around to make a fortune when good times come knocking. Going by that logic, the Indian banking industry is set to provide them ample opportunities now. As they say, bad loans are made during good days, it’s just that you realise the pile of (worthless?) waste when days go bad. The situation with Indian banking industry is more or less the same. While there has been much talk about how well the Indian banking industry has managed to stay insulated from ills of the global crisis, rise in their gross NPAs to advances ratio, especially in the first quarter of the current calendar year (gross NPAs of public sector banks other than SBI rose 10.5%), got every one thinking.

Gross NPAs of a few public sector banks including Indian Bank, Central Bank and Punjab National bank shot up by as much as 35% of their value a year ago. As a result, it’s time for the ARCs to arrive at the scene to infuse make banks’ books appear pretty. And all this at a time when the ARCs are being ridiculed by almost everyone around, especially since the past 12 months or so, when everyone started dreaming of a quick recovery.

It is high time the ARCs prove why they are such an essential part of the financial industry. It is also time that the Indian banking industry admits to the benefits of the ARCs, which are all set to make their living appear worthier on paper, especially in the light of the current market condition. In short, ARCs will play the doctor and keep the banks’ NPAs under check. Period.

CASH IS KING, HOLD ON TO IT

Honestly, I can’t take personal credit for the pathbreaking guru-speak that you must have witnessed in this editorial’s heading – “Cash is king, hold on to it.” From management writers like Ramcharan to top of the lot financial practitioners like V. Balakrishnan of Infosys, maintaining of what I term ‘superhealthy’ cash reserves has been encouraged to no ends, especially in times of economic slowdown. Of course, there’s a double whammy hidden within this that even the likes of Dinesh Trivedi can easily forecast – and that is that when savings, especially cash holdings, go up, investments and consumption automatically reduce. And this leads to a further spiral down for economic growth, with a lovely backhanded slap of an El Dorado waiting at the end of the rainbow – an economic deflation cycle. And unfortunately, the way events are unfolding in the global financial system, this fear is not without sound logic. With the eurozone crisis worsening by the day with no respite whatsoever in sight, corporate India – like me – could well have started believing that the ongoing meltdown will snowball into a full fledged crisis and will continue till the end of 2012, if not any further.

But honestly again, the current scenario is quite paradoxical. By no means are Indian companies cash strapped to such an extent that they need to hoard up superhealthy cash reserves, more so when we are talking about the top 500 (BSE 500 constituents). But that’s exactly what they have been doing and were doing even during the last financial year. As their balance sheets suggested, by March 2011, the BSE 500 constituent companies had piled up a mammoth cash and bank balance of $96 billion (Rs.4.88 trillion at current conversion rate). This figure has only grown till date. At the same time, India Inc is apparently facing a liquidity crunch, which is severer than the situation in 2008; at least 45% of corporate India believes that way as per a recent FICCI report. Raison d’être: In the wake of the global crisis, trade credits have been curtailed, external commercial borrowings are hard to avail, not much money is present in the primary market, PE investors are either weary to invest under the present economic scenario or are waiting like vultures for the right time, and the last but not the least, the domestic banking sector has become very selective in lending, to safeguard their own asset quality.

If that was not enough, input costs have skyrocketed over the past year and companies have not succeeded in passing on the full burden to consumers at all stages resulting in squeezed margins (negative growth of 14% year-on-year in BSE 500 PAT for the 9-months ended December 2011). As a result, no one wants to part away with their cash balance at present. So much so that 50% of the respondents (82% of which were large corporate entities) interviewed in the FICCI survey said they were planning to hold on to their cash balances at least for another six months.

Without doubt, our economic growth is slowing down due to this double trouble of banks reducing lending to protect themselves, and large corporations postponing investments and consumption to a later date. So should the companies change track? The answer is no, not at all. Why should a profit motive driven company suddenly feel the need to be patriotic and free up its cash reserves? This might sound weirdly un-nationalistic, but a company’s primary responsibility lies towards its shareholders, not towards the nation. It’s the government’s job, and not that of privately run companies, to ensure more liquidity in the market. If the banks have become subdued (lending to industries by scheduled commercial banks have fallen from 25.9% in March 2011 to 22.1% in November 2011), then alternative fronts like NBFCs must open up to ensure that lending to industries is not hampered. And that is the crux of this issue’s cover story, which presents a hypothesis that there is no time better than now to promote NBFCs. So here goes my guruspeak again: “Cash is King, hold on to it... and pray the government gets it right this time.”