Public Sector Asset Rehabilitation Agency (PARA): Advantages & Disadvantages

Witnessing the Twin Balance Sheet Problem and the rising difficulty to tackle it by other means, the government has proposed yet another reform as a last resort. It has proposed to introduce the Public Sector Asset Rehabilitation Agency (PARA) for the rehabilitation of the public sector banks and companies who are facing this crisis. It is to be a centralized approach where the Agency will take charge of the assets of the worst affected Public Sector Undertakings and try to reduce their debt to a large extent.

This approach is a comparatively unique one, expected to bring some improvement in the position of the PSUs. But only a proper analysis of this proposal in terms of its working, advantages and disadvantages can give a true picture of the situation.

What is the Twin Balance Sheet Problem?

This problem has been brought to limelight with the Economic Survey of 2016-17. The survey indicates that a two-fold problem has arisen: on one side are the companies which are overleveraged and distressed and on the other hand are the Public Sector banks whose balance sheets are showing a rise in the NPAs (Non-Performing Assets).

The reason is that during the years of economic boom, various companies borrowed from banks to invest in infrastructure and commodity related businesses like steel, power etc. But after that these sectors started going in a slump resulting in loss to these companies. As a result of this, the companies have not been able to repay their debts causing this over leverage. At the same time, due to these defaults, the number of NPAs in the banks has increased as a major part of its assets comprises of these loans granted.

Effects of Twin Balance Sheet Problem

Due to increased borrowings, debts, and declining earnings the corporate sector is unable to invest which is the backbone of private investment in the economy. While due to increasing NPAs the banks reduced the credit available for loans. This is hampering the economic growth of the country to a very large extent.

PARA-Why do we need it?

The Twin Balance Sheet Problem and those troubling figures alone do not call for a measure like PARA to be adopted. It is more required in the light of failure of other mechanisms to tackle the problem. One such mechanism was the Private Asset Reconstruction Companies- They worked the other way. They took debts of the companies and tried to restructure them. This failed because the new bankruptcy system did not come to place effectively and they were too small to handle bad debt cases of large companies. Its focus was on coordination in debt management, which failed considerably.

How does it address the TBS Problem?

Instead of the previous decentralized approach, PARA now follows a centralized approach. Under this approach, the Public Assets Rehabilitation Agency will purchase the loans of the over-indebted infrastructure and steel firms. Then it will try to work out using several methodologies, one of them being the professional assessment of value-maximizing strategy to come to a conclusion as to how these debts can be paid and written off.

A huge amount of investment in the project is required which can be done only through fulfilment of capital requirements by the government. Some of the sources of this capital include:

• Earnings from the issue of government securities
• Capital market- this is possible if some of the stakes in the public sector banks are sold to the private sector in the form of an equity share.
• Reserve Bank of India can play a major role by transferring some of the government securities in its possession to these public sector banks and PARA.

Benefits of PARA

One of the major benefits of PARA is that by taking away the bad debts of the bank, it releases the bank of a huge amount of its financial burden. It has two major benefits:

• Reduction in burden on banks-By taking away these bad debts, the PARA shoulders the responsibility of all the debts. This reduces the burden on the banks to find ways to get back their bad debts. The PARA particularly concentrating on this task can do it more effectively than these banks. Thus, banks can think of utilizing their human resources in focussing on other important activities than debt restructuring.
• Restoring financial health– By buying these debts, it recapitalizes the bank. Once this is done, banks with greater capital can now focus on making new loans.
• Concentration on one Agency-Since the bad debts are all now concentrated in one agency, it is easier to find a true estimate and address it step by step.

Disadvantages of PARA

It has been argued by many critics that PARA in reality does not provide any new means to solve this problem. It actually suffers from certain major loopholes which cannot be ignored. These are:

• Problem of disposal– It has somehow been ignored that the PARA will face the same problem as that of banks in disposing of these debts. Although it may be having some methodologies to do it, it requires huge finance to do this. There is not even much market for stressed assets owing to the reason as many sectors are currently plagued with overcapacity. So, it cannot really resort to selling these assets to a large extent.
• Operational discrepancies– Many critics have pointed out that PARA proposes a very unclear method. The methods proposed are only a slight variation of the old ones like the ARC. They failed because of these mechanisms. So adopting them again can lead to a continuation of the problem.

Conclusion

In spite of all these discrepancies PARA still seems to provide a new ray of hope for improving the position of Public Sector Banks and somewhat for the corporate sector also. As there are two sides of every coin, every new scheme also has its own benefits and drawbacks. One needs to try to maximise the benefits and reduce the drawbacks as far as possible. It should not be forgotten that if PARA is not adopted, we have to still rely on the earlier failed approaches, which is definitely not a viable option. Therefore, one should give PARA a chance to come into operation and at least start its task. The problems can then be assessed better.