“Bad bank” for big companies: The Tribune India


Aunindyo Chakravarty

Senior economic analyst

The PINK PAPER experts who want BSNL, MTNL, SBI, PNB and all other public sector companies shut down or sold, are in fact secret socialists. They like socialism, as long as it is reserved for big business. After all, what is socialism? It is the social ownership of capital and resources. And when we say “social” we inevitably mean “state” ownership.

Pvt companies make bad investments and bad business decisions, and the taxpayer has to pay for them.

Traditionally, public ownership of companies and assets has been frowned upon by mainstream economists. They say the state has no business in the economy; leave the business to the businessmen. But what if these same businessmen mess up their investment decisions and incur big losses? Traditional economists will find some economic logic in asking the state to take over their businesses and let them get away with it. Indeed, it is socialism for the capitalists.

We are seeing that happening right now. The first is sold to us as telecommunications “reforms”. What are these reforms? Private players have entered a race to attract more users, investing huge sums in buying spectrum and selling waves at very low prices. Even before Reliance Jio came in as a game-changer, incumbents like Airtel, Vodafone and Idea were offering discounted packs to entice people to use multiple GBs of data and make long phone calls. Jio pulled the rug under their feet by offering free data for a limited time. Since its launch in September 2016, Jio has managed to increase the total number of telecom subscribers in India by 11.5% in just four months.

As Jio began to grow rapidly, the other big players had to try to come up with similar lollipops to keep their followers from jumping ship. Average revenue per user (ARPU) collapsed, while usage rose sharply. Airtel, Vodafone and Idea suffered several quarters of heavy losses. And when Vodafone and Idea merged to directly counter Jio, it was billed as India’s most valuable telecommunications company.

The problem was, Jio had a different business model, a favorable political environment, and a parent company with one of the richest pockets in the world. Vodafone-Idea, or Vi as it was later renamed, had no choice but to bleed. It now rests on massive debt of almost Rs 1.9 lakh crore. This is why Kumarmangalam Birla has offered to hand over his shares to the government, if he postpones Vi’s bonds to pay Rs 62,180 crore in arrears. in taxes and Rs 1.06 lakh in spectrum fees. Now, thanks to these “reforms” announced by FM Nirmala Sitharaman, Birla got what he wanted.

Interestingly, the government also said that if telecom companies were unable to pay their dues after the four-year moratorium period, they could “pay” it in equity. Some brokerage reports began to consider scenarios in which Vi would become a public company. Even before these reforms were announced, a leading international bank backed the government to take over Vodafone-Idea and merge it with BSNL.

Imagine the irony here. All the while we have heard that the public sector is bad and the private sector is extremely efficient. Now we are told that in the “public interest” Vodafone-Idea cannot be allowed to die. He has too many subscribers who need to be protected. Throwing into the sea all talk about the effectiveness of impersonal market forces, the government is asked to bail out a private company, using taxpayer money, supposedly for the public good. Keep in mind that this is a government that apparently does not have enough money to spend on public investment and has actually cut spending in the first three months of this fiscal year compared to Last year.

So, private telecommunications companies make bad investments and bad business decisions, and the public, in the form of the taxpayer, has to pay for them. It is broadly the same idea behind another “daring” reform – the “bad bank” which was announced Thursday. This bank will take back some Rs 2 lakh crore of bad debts that are on the books of ordinary commercial banks, and try to collect them over a period of time.

How will it work? Suppose a group of banks loaned Rs 500 crore to a business whose business failed. The banks have very little hope of recovering the money they loaned, so they decide to “sell” this loan to the bad bank for Rs 300 crore. Banks take a one-time hit of Rs 200 crore, but get 60% of their money back. The bad bank takes over the company’s assets and tries to sell them, hoping to get more than what they paid the banks. The banks write off part of the loan and clean up their books.

Since the bad bank is supposed to take over bad loans of around Rs 90,000 crore in the first phase, it will need to have a significant amount of cash. Banks that “sell” their bad debts will have to receive at least 15% in cash and the remaining amount in “collateral receipts”. These revenues will be backed by a sovereign guarantee from the Indian government: if the failing bank fails to pay what it has promised, the government will fulfill it.

But who benefits from this? At first glance, it is the public sector banks that hold the overwhelming majority of bad loans. In reality, the biggest beneficiaries will be large companies. Public sector banks had become cautious about credit, due to the large share of bad debts on their books. Once these are taken off the books, these banks can resume lending freely to companies who can again bet on sectors without any proper viability assessment. And it will be the same big companies that are primarily responsible for the bad debt crisis in India.

In other words, these banking and telecom reforms are just a new form of “socialism”. But this time it is reserved exclusively for capitalists.

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