Hon'ble finance minister has recently announced the recapitalization of PSBs. Among the many discussions it has ignited has been the question of what has led us to this situation? Depending on which side of line you are the explanations vary. Of the many reasons that has come to fore are: 1. Aggressive bank financed capacity expansion by the private sector during the "boom" period followed by financial crisis. 2. Judgement of hon'ble SC on spectrum allocation that led to reallocation through auction increasing input costs. 3. Priority sector lending to infrastructure projects etc. which later proved to be nonviable. 4. Political interference in the management of PSBs & reckless lending to wilful defaulters 5. The fear of 4Cs under which the PSB management operates and the resultant delay in NPA resolution through writing off the bad loans. Hence, the government has announced that "reforms" will precede the "recapitalization" to make sure that such situation is not repeated. However one of the important issue that has received little attention is the role of "disruptive technology" which has revolutionized many of the sectors in which the lending took place.
Various commentators have highlighted that huge share of NPAs pertain to the power & telecomm sector. During the boom period it was realized that too fuel the engine of growth, a garangutan leap in India's power generation capacity is required. Thus, huge investment in setting up coal based powerplants & auctioning of mines took place in which private sector was more than happy to participate. The govt. made sure that finance for setting up these power plants is available through PSB loans.
So far so good. With all this investment, India soon became a power surplus country from a power deficient one. Yet, this surplus presents a false picture. Whats the use of all this surplus if a huge part of country still has no access to affordable and reliable power supply! To address the issue of accessibility the govt. launched SAUBHAGYA scheme & to address the issue to affordability the govt. tried to clean up the finances of DISCOMS via UDAY scheme. Yet 3 years down the line the power plants are running at plant load factor of 56% down from above 80% in 2000s. The DISCOMS are unable to buy more electricity as they have no extra money. Hence, the "recapitalisation" of DISCOMS via UDAY has not worked the way govt. wanted.
Of the many reasons ailing the DISCOMs is the new challenge from renewables. With "climate change" attaining centre stage at COP21, research on renewables has received much attention worldwide. With many countries opting for renewables and economies of scales kicking in, the cost renewables have precipated. It has gone down to a level where the tarriff has become even cheaper than the coal based power. Hence, DISCOMs have deserted the coal for renewables and many have announced that they will renegotiate the Power Purchase Agreement with the coal power generators to get better deals. On the other hand hon'ble SC has called the agreement sacrosant with no scope for renegotiation. Still, will load factor as low as 56% the generators are unable to pay the interests they have taken from NPAs. At the other hand DISCOMs which are state owned are still making losses, thanks to cross subsidies, competiton from captive power generation and transmission inefficiencies. Both the DISCOMS and power plants have a high risk of defaulting on their loans.
The other sector disrupted by technology is telecomm. With the coming of 4G, the business of 2G providers have become unviable. The Reliance communication has losses running in thousands of crores and is unable to pay back the its loans. The other major issue of unemployment is as much a result of diruptive technology as it is of inequitable growth.
So the question that affronts us is that if there was no development of renewables or 4G or AI, would we have been in the same situation as we are today? The question is for anyone to answer. Fortunately, these changes are an exception rather than the norm. Many experts have called this the "fourth industrial revolution" and a revolution by its nature is disruptive. And while we are here the revolution is still taking place & will encompass more sectors sooner than later.
Interesting perspective. I think what comes out is the lack of a long term understanding of the market changes that our legacy players(both banks and defaulters) are plagued with because of which they undertake these projects with short term demand and pricing projections in mind. It is imperative for corporations that every project financing proposal should factor in the major technological disruptions that are likely in the years when the project intends to monetize, and see if it will stand the test of time in this rapidly evolving world where even Facebook seems old school now ! Banks need to start acting like Venture Capitalists who fund each startup(here each individual project) on its long term money making merit taking into account all factors-Team, Industry, Competitivenes, Sustainability to judge its financial worth.
ReplyDeleteThe private sector has its own limitations. It can only move in a particular direction in which the govt. nudges it to go via policy levers at its disposal. For ex: Higher gst for hybrid vehicles is a disincentive for private sector to proceed in that direction while on the other hand govt. has been promoting hybrids through different schemes since last few years. Yet suddenly someone at the high chair changed his mind and the govt. decided to go for full EVs instead of hybrids. The industry which has already invested hugely in hybrids by now finds itself in limbo.
DeleteAt the govt's end expecting the efficiency of private firm will be unjustified. Even a country like US sees its govt. flip flopping on issues like Paris treay or Trans pacific partnership. Democratic polity has its own limitations. The other alternative is china model with high efficiency but low individual freedom.
In the present context one solution is more private banks, with role of public banks limited to priority sector lending and for welfare based finance schemes of govt. Public to private lending is bound to create problems due to huge appetite of PSBs for risks.