Insolvency process: Competition Commission should see if monopolies are forming, says Yashwant Sinha

Over the last four-and-a-half years, the Bharatiya Janata Party-led National Democratic Alliance government has done much to constrict India’s economy.

Demonetisation hurt the smallest businesses: those of the self-employed. Their incomes are yet to return to pre-demonetisation levels. Many slightly bigger businesses, like small and medium enterprises in industrial clusters like Surat in Gujarat and Tirupur in Tamil Nadu, closed down after the introduction of the Goods and Services Tax in July 2017.

What has received less attention is the government’s ham-handed treatment of the country’s bad loans problem. The government’s insolvency proceedings have created a situation where a handful of companies are buying most of the distressed firms put up for sale by banks. The implications, as Scroll.in reported in October and November, run deep. They include both the possibility of cartelisation in the country’s core sectors and a freeze in fresh investments.

Adding to this, India’s financial institutions have taken a pounding. With the government preferring fealty over capability, institutional autonomy has come under a cloud. At the Reserve Bank of India, for instance, the government first replaced Raghuram Rajan, who opposed demonetisation, with Urjit Patel, who mutely allowed it, and then with Shaktikanta Das, who loudly defended it.

In April, Yashwant Sinha, finance minister from 1998-2002, during the Atal Bihari Vajpayee government, resigned from the Bharatiya Janata Party. He has emerged as one of the most prominent critics of the Narendra Modi government. His book India Unmade: How the Modi Government Broke The Economy, released in December, details his thoughts on what the administration has done wrong. Scroll.in spoke to him about how the economy could be revived.

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Interview: Income support schemes for farmers are a cop-out, says economist Abhijit Sen

On January 1, when Indian news agency ANI asked Prime Minister Narendra Modi about the government’s plans to reduce agrarian distress, he said loan waivers do not work as a very small segment of farmers take loans from banks. “A majority of them take loans from money lenders,” said Modi. “When governments make such announcements, those farmers do not become beneficiaries of the waivers.”

Calling loan waivers a political stunt, the prime minister told ANI the government would empower farmers in other ways. In that context, an idea from the South Indian state of Telangana has been getting some attention. The state government gives its farmers Rs 4,000 per acre per year as income support. States like Jharkhand and Odisha have followed suit. The first has announced a Rs 5,000 per acre payment from next year. The second plans to transfer Rs 10,000. There is speculation that the Union government might follow suit.

It is easy to understand why politicians find these ideas attractive. As capital becomes global even as labour stays local, governments are increasingly unable to provide jobs for all their people. One outcome, according to economist Abhijit Sen, a former member of the erstwhile Planning Commission, is that politicians, increasingly unable to find answers, turn to interventions like regular cash payments to the citizenry.

The country needs to tread carefully on this idea. Income transfer schemes come with large questions. Where does the money come from? Given competitive politics, can these burgeon out of control? If so, what happens to developmental expenditure? What happens to a society where states collect revenues from a small handful of businesses and keep a large chunk of the population on the dole? Whom are they more answerable to?

Excerpts from an interview.

Biggest winner of Modi’s loan-in-59-minutes plan for small companies is an Ahmedabad fintech startup

On November 2, Prime Minister Narendra Modi made a slew of announcements aimed at reviving India’s faltering micro, small and medium enterprises. One of these was about a dedicated digital platform – www.psbloansin59minutes.com – to enable them to access loans of upto Rs 1 crore in just 59 minutes.

Unlike their larger counterparts, India’s smaller companies have long faced difficulty in accessing bank loans. The psbloansin59minutes website was presented as the solution. Once a firm uploads key information such as tax returns and ownership details, proprietary algorithms on the website appraise the application, determine the loan amount that can be given and then connect the applicant to a bank branch – all in under 59 minutes.

As it turns out, the website mirrors the aims outlined in a tender issued by the state-owned Small Industries Development Bank of India on January 22, seeking to hire a consultant to set up a new legal entity that would facilitate contactless lending.

“The solution will use algorithms and techniques to read complex balance sheets, IT returns and bank statements in a very short time,” said the tender. “These solutions can easily capture the basic details of the applicant from present documents. Smart analytics will enable the proposed solution to find discrepancies and automatically pull information from credit bureaus. More importantly the decision-making process for a loan officer can become simpler as the solution provides a summary of credit, valuation and verification on a user-friendly dashboard.”

The tender went on to define eligibility requirements. To qualify, consultants needed to have earned a fee of at least Rs 50 crore from management consulting during the three preceding years. “The consultant should have been in existence in India since April 01, 2012,” it stipulated.

Once a consultant was shortlisted, said the tender, a new legal entity would be formed, in the form of a company with SIDBI and other banks as shareholders.

However, a closer look at psbloansin59minutes shows that the company behind it does not quite meet the tender stipualtions. The website is not run by a new legal entity as envisioned by the SIDBI tender. Instead, it is run by a Ahmedabad-headquartered fintech company called CapitaWorld Platform, which was set up in 2015.

Arun Jaitley is being disingenuous in blaming RBI for the troubles of India’s small and medium firms

What India’s Finance Minister says…

The finance minister this week criticised the central bank for failing to check indiscriminate bank lending from 2008 to 2014 which has now ripened into a bad loan crisis. The attack was accompanied by the government invoking never-used powers under the Reserve Bank Act to issue directions to the bank’s governor, Urjit Patel.

What he stays mum on…

If the MSME sector was tottering by the time Arun Jaitley became India’s finance minister, the next four and a half years felled it.

First came demonetisation. On November 8, 2016, the government suddenly announced that Rs 500 and Rs 1,000 notes were no longer legal tender. This created an unprecedented cash shortage in the country. As economic activity dropped, households and small businesses took a beating.

Less than a year later, on July 1, 2017, came another shock. The Goods and Services Tax was introduced even before the MSMEs’ turnovers had returned to pre-demonetisation levels. As Scroll.in reported from Gujarat at the time, India’s new tax regime for businesses favours formal economy players more than those in the informal economy – which is entirely made up of MSMEs. In South India, high tax slabs pushed MSMEs in the automotive cluster of Hosur into the red, forcing them to take bank loans to pay taxes.

While firms were still grappling with the new tax regime and figuring how to survive, there came the cash crunch of December 2017. As Scroll.in reported, multiple reasons were at work, including a collapse of the government’s cash distribution protocols.

From a quick comment published today on the government’s attempt to pin blame on MSME distress on the RBI.

India’s curious inflexibility in trying to fix its bad loan crisis is leading to unforeseen problems

India’s crackdown on companies that have defaulted on loan repayments is reshaping the country’s economy in fundamental ways. As the first three articles in this series detailed, competitive advantage is being tilted towards larger firms because only a handful of buyers is picking up most of the insolvent firms on sale. Between the resulting consolidation and the fact that most of these firms are changing hands at low rates, existing companies will struggle to compete. In addition, regional companies are being pushed into businesses beyond their core strengths.

These processes have been in motion since January 2016, when India’s banks, prompted by the Bharatiya Janata Party-led government and the Reserve Bank of India, started taking defaulting firms to the National Company Law Tribunal in an attempt to recover outstanding loans.

These structural transformations have been caused by the curious inflexibility that characterises India’s insolvency proceedings, which place the blame for bankruptcy entirely on the firm’s promoters, experts said. “The government is not making any concessions,” complained the chief financial officer of a steel plant in Chhattisgarh which has slipped into insolvency proceedings. “It is just putting the project up for sale.”

Inflexibility also shows in how these distressed projects are being rehabilitated. This is obvious from the way the proceedings have unfolded for a thermal power plant set up some 10 years ago by a well-regarded business group in North India. The group’s chief financial officer, who is in his mid-50s, said in his 35-year career, he has never seen anything similar to India’s bankruptcy proceedings that his unit is now facing.

We have the fourth — and concluding — part of our series on India’s insolvency proceedings out today. The first part, to recap, had flagged some curious patterns showing up as companies change hands to argue we need to pay more attention to these proceedings.  The second looked at the handful of buyers picking up most of these stranded assets. The third looked at what this means for local capital as global capital (and big capital) comes in.  Today’s piece builds on those observations, using them to point out the self-damaging inflexibility that characterises India’s insolvency proceedings, tries to understand its origins, asks if there was a better way to handle all this, and then ends.

India’s proceedings to recover bad debt are reshaping Chhattisgarh’s economy – and politics too

A baton is changing hands in Chhattisgarh.

Big companies are entering the state’s steel and power sector, using India’s ongoing insolvency proceedings to buy distressed firms. At the same time, Chhattisgarh’s local steel makers, several of whom entered the power sector in the mid-2000s, are looking beyond these two sectors.

Part Three of our series looks at how NCLT will affect the provincial business classes of India — as the buyers detailed in Part Two come in.