Auctioning stressed assets works in only simple cases
On the face of things, one of the plans being talked of to deal with stressed assets, outlined in The Indian Express last week, seems to check all the boxes. Apart from the issue of capital for banks that still needs resolution, the biggest hurdle to selling bad assets at a discount, is the fear CVC/CAG/CBI will question the valuation. If, however, there is a transparent auction, there will be no such problem. All data on the stressed asset/company will be put out in the public domain—in a data room where potential buyers can do due diligence—and, subject to strict technical scrutiny of buyers, whoever wants the least haircut can walk away with the asset. While that sounds good, the fact that banks are struggling to find bidders for each simple assets like cars and villas belonging to Vijay Mallya should give reason to pause.
Auctioning off companies may work in some cases, but each case is different. For one, since no bank is the sole creditor, you would need a bad bank to first take over the asset and restructure it first—theoretically, a Joint Lenders Forum (JLF) should work, but JLFs haven’t done that well. The reason why a bad bank is a better bet than a bank doing an auction is also that banks have an incentive in keeping the loss to the minimum—so, it is very possible that buyers in the auction may end up being just fronts to park the losses; the fact that many loans sold to ARCs didn’t end up getting fixed suggests this is a strong possibility.
While this aspect can be fixed by the government/RBI putting in place very strong rules to decide who can participate in loans—a committee can, for instance, decide on who will be technically qualified before the financial bid is opened—there is another more serious problem. Auctions, by their very nature, are single-variable outcomes—or multiple variables have to be reduced to one by suitable weights. Selling off a stressed steel plant, on the other hand, could involve not just a haircut on the debt and a complete write-off of equity, but there could be a negotiation on how much of the staff have to be retained or whether a guaranteed offtake should be assured at a fixed price for a certain period, and a lot more. Theoretically, a bid can give weights to each of these inputs—25% for retaining more than 95% of the staff—but that gets very subjective and messy; look at the mess this created in the original auctions for the Delhi airport a decade ago. Also, in order to know the weights before the bids are called for, the seller has to know all the possible options the buyer could want—a theoretical impossibility. So, keep the possibility of auctions of some assets on the table, but apply it on a case-by-case basis.