Tuesday, February 2, 2016

The decision paralysis example of the day

As the Non-Performing Assets (NPAs) of India's banks mount and the RBI has allowed them to assume majority equity stakes through the Strategic Debt Restructuring (SDR) mechanism, the role of Asset Reconstruction Companies (ARCs) assumes greater significance. But so far ARCs have made limited headway in the Indian market, with the 15 existing private ARCs having a combined net worth of just Rs 40 bn and have been able to resolve just a third of their acquired assets. 

In this context, this quote in the Indian Express gets to the heart of the challenge,
Public sector banks are scared to sell to private ARCs for fear that the quantum of hair cut can always be questioned by the government’s auditor, vigilance or at worse be probed by the intelligence agencies.
This is very relevant in a bureaucratic environment where every decision is likely to be subjected to post-facto scrutiny, often many years later and completely divorced off its context. Consider the case where an ARC makes windfall gains from one of its assets. A malicious complaint can trigger an enquiry. An auditor, with limited awareness of the context, can attribute presumptive loss and fault the decision by the bank management to take haircuts. An investigating agency with no professional competence to investigate the issue could find fault with the magnitude of the haircut or not having given the asset to a public ARC or managed itself. A humiliating media trial confined to headlines follows.

Construction of such counterfactuals and hindsight with half-knowledge creates a moral hazard which engenders, at best, sub-optimal decision making, and, at worst, decision paralysis. In this environment, vitiated further by deep political acrimony, it is highly unlikely that a large scale program of distressed asset sales from public sector banks to private firms can be pulled off. The systemic constraints, relaxation of which may be beyond administrative and legislative actions, are just too binding. On the issue itself, here is more on what needs to be done to enable the market for ARCs in India.

No comments: