Big News for the week ending 23rd June 2017

Operation NPAs

Will the most ambitious attempt be actually successful?

 

The RBI has embarked upon one of the most aggressive phases of NPA management. It has actually attacked the NPA problem simultaneously at two levels. Firstly, at the banking level, the Prompt Corrective Action (PCA) has been initiated against banks that have net NPAs beyond a certain threshold. The PCA will entail granular scrutiny of operations, restrictions on dividend payout, limits on recruitment and employee compensation, bar on branch expansion etc.

 

At another level, the RBI is addressing the NPA problem at the level of the defaulting company via the Insolvency and Bankruptcy Code (IBC). The IBC offers defaulting companies a period of 180 days (extendable to a maximum of 270 days) for finding a resolution with their creditors. If that is not possible, the RBI will refer the defaulting company for liquidation. Both the PCA and the IBC have attacked at the core of the NPA problem. The question is whether it will be successful in practice?

 

Need a secondary market…

 

That is going to be the biggest challenge for the banks. Most of the financing has been raised by these companies against their plant and machinery as well as their rolling stock. For example, with steel companies being among the key defaulters in the current scenario, there could be a glut of steel capacity in the market. If there are not too many willing takers, then the asset may have to sold through a distress sale, which will further impair the recovery rights of the bank.The entire process will have to done very discreetly on a B2B basis. RBI has to be cautious about a glut of capacity supply.

 

Air India

What exactly should the government be doing with it?

What should you do with a business that has racked up an overall debt burden of Rs. 50,000crores and is consistently making losses for the last many years? The simplest answer may be to wind up the company or find a suitable buyer and hive it off at a throwaway price. The only problem is that the company in question is India’s national flag carrier, Air India. But firstly, why exactly is Air India racking up such huge losses?

 

The price of state ownership…

 

Air India and Indian Airlines had literally ruled the skies before private airlines were permitted to fly in the early 1990s. Today the larger players like Indigo, Jet, Spice Jet and Go Air have cornered nearly 90% of the overall domestic civil aviation market and most of the incremental growth over the last 10 years has entirely accrued to these private carriers. Being a state-owned airline, there is the big challenge of too much political interference. By catering too much to politicians, bureaucrats and other government officials, the airline has literally lost its business panache. But the real challenge that Air India faces is that it is forced to fly on many non-viable and non-metro routes purely to enhance connectivity. Many of these flight paths do not really make business sense. And in a competitive industry like aviation, Air India still relies on the age-old pull strategy; at a time when private players are pitching the push strategy quite aggressively to customers.

GST Launch

Why the government must go ahead on schedule…

With the GST launch date of July 01st fast approaching, the jury is still out on whether Indian business is prepared for the launch. Frankly, there are no clear answers and one will know only once the entire GST is implemented. There are, in fact, 4 key reasons the GST Council must go ahead with a timely launch. Here is why…

 

No room for simulation…

 

The problem with a project of such magnitude and complexity is that you can never simulate to perfection. It is like trying to simulate a war situation. Even with the best of training and preparation, there will be an element of surprise in actual implementation. The same applies to GST. There is no point in spending more time simulating. The GST Council will have to go ahead with the launch and address challenges along the way as they come.

 

Need time to watch inflation…

 

One of the big challenges of GST in most countries has been the inflationary impact in the first few months. While the GST Council is confident of keeping inflation in control, one will have to really test the waters. Getting too close to the 2019 elections will reduce the incentive of the current government to go for aggressive implementation of the GST. We have less than 2 years for the next elections and it is the right time to test waters with limited risk.

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