NPA. A very vexatious issue. What is terrible is that loans get written off or there is some Crony Debt Restructuring (CDR) and it is business as usual again. There are companies like Indo Count Industries etc where the banks have made sacrifices and all the upside after the loan waiver has been to the promoters.

My suggestion is that whenever there is a loan waiver, the banks should be issued a mix of Preference Shares and Equity Share Options at par equal in value to the amount sacrificed. The options could have a ten year expiry.  All these options can be pooled in to a separate investment vehicle that is managed by professionals in an SPV that belongs to the GOI. This will ensure that the the banks also get some share in the upside.

The preference shares can have a put option at the end of 3 years or so and banks can get it back. The preference shares should carry a dividend  and there should be a condition that preference dividend will get priority over equity dividend and the rate cannot be lower than the equity dividend. Similarly, if there are any stock splits or bonuses, or any other dilution, the bank must be compensated.

It is tragic to see the promoters laughing their way to riches after looting the public money from banks. As it is the public bear the brunt of farm loan waivers. While one could probably attribute that to socialism, this corporate debt write offs has a rich mix of fraud and corruption.

I know my suggestion will not be liked by the business community, but I am sure that any rational human being would support it.

Now, which side of the coin do the politicians, the PMO, the RBI fall? Are they on the side of the businessmen or are they rational?

Yes when there are genuine business failures, there is no impact. But this scheme would work like a pooled insurance. I recall the old days when the development institutions had a compulsory conversion clause for a part of the loan. This kept institutions like IDBI/IFCI alive for years beyond their practical death

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One thought on “NPAs- ONE way to treat them

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