Thursday, February 23, 2017

India's private universities fail to make a mark

Shiv Nadar, Aziz Premji, O P Jindal, Munjal, Bennett.... we have quite a few universities started by private industrialists. Yet, none has made a mark thus far as a quality institution, notes Anjuli Bhargava in BS.

That's true of professional colleges as well. There's no engineering institution that can match the IITs, hardly any that match the IIMs and the AIIMS or even other prominent government medical colleges.

Why so? One reason that Bhargava mentions is the lack of high quality admission standards. Indeed, many of these universities go all out to woo student candidates, something no self-respecting institution would do. Another is that they are far too focused on hardware and too little on software, namely, faculty and research. And a third is that promoters run them as they do their own businesses- by calling the shots and not giving enough leeway to professional educators.

I guess all of this is true. But another crucial factor is that most private universities have a profit motive in mind- they are looking for returns, preferably quick returns. Whereas the striking thing about private universities in the US and some other places is that these are non-profit in orientation and are sustained by large endowments.

No educational institution that aims to generate surpluses out of its operations- mostly running degree programmes and, in some cases, consultancy and executive training- can be expected to produce high quality in the long run. There's a view that, ever since the IIMs have been left to set their own fee, they too are focused on revenue generation. Their reputation was built in a period when they were sustained by government funding and did not have think about surpluses.

Worldwide, the combination of quality and access is possible only when there's a large element of subsidy built into higher education. In India, it's public universities that conform to this model. The worry about IIMs now must be whether they will end up in the same bracket as private universities.

Friday, February 17, 2017

Budget for FY 2017-18

I was amongst those who produced instant wisdom on the budget this year- wrote up my piece by 5 pm after the budget speech was announced. Quite an experience because it was hard to access the details until about 2:30 pm at the finance ministry website, perhaps due to the heavy load on the server.

To do justice, you need to have the budget estimates for the previous year, revised estimates and budget estimates for the current year on a spreadsheet. This is next to impossible when you are writing to a tight deadline.However, one can get a sense of whether the budget got it right on the whole.

Here's my analysis in the Hindu, A budget few can quarrel over.

Thursday, February 16, 2017

Can a public asset reconstruction company resolve India's bad debt?

I have a piece in Business Standard today.

Since the article is behind a pay wall, it's reproduced in full below:

The Economic Survey has proposed a Public Asset Rehabilitation Agency (PARA) – a so-called “bad bank” – for tackling bad loans in the Indian banking system. We already have several Asset Reconstruction Companies (ARCs). So what’s new?

PARA will be much bigger in scale and will have substantial government equity. Besides, a big chunk of bad loans relates to valuable projects in infrastructure and related areas. Many of these projects need to be completed through further infusion of capital from promoters. Some of the debt has to be written off and some restructured in order to restore viability.

The existing ARCs are just not equipped for such a role, at least on the scale required. They are mainly in the business of effecting recoveries through liquidation of assets.

The Survey argues that leaving it to banks to resolve bad loans has not worked. At public sector banks (PSBs), management is unable to write off debt for fear of inviting investigation. In many bad loans, several banks, public and private, are involved. This gives rise to problems of coordination. Banks can’t agree on the write-off required in a given case.

Transferring some of the biggest bad loans to a well-capitalised PARA could help resolve the coordination problem. As the government stake in PARA will be 49 per cent, managers can resolve loans without fear of inviting scrutiny.

This sounds fine — until you get down to the details. One challenge is the prices at which bad loans will be sold to PARA. Determining the market prices for bad loans is not easy. Getting banks to agree on a sale price could pose its own problems of coordination.

If the sale of bad loans to PARA were perceived to be under-priced, PSB management would be exposed to the wrath of the CAG, CVC and CBI. If they were over-priced, private investors in the proposed PARA would begin to fret.

The challenge of writing off debt remains. Managers at PARA may be able to exercise their discretion a little more freely. But the government is ultimately accountable for decisions taken by an entity in which it is the dominant investor. Every resolution will be closely watched. Expect howls of “scam” to be raised given that high-profile corporates are involved.

The Survey estimates that of the top 100 stressed debtors, 10 would need debt reductions of 51-75 per cent and 57 would need reductions of 75 per cent or more! Over 40 per cent of the debt is owed by companies with an interest coverage ratio of less than one. As the top 50 companies in this category owe an average of ~20,000 crore, the write-offs required are of staggering proportions.

Unlike many of the shrill critics of the public sector, the Survey doesn’t see recapitalising PSBs as throwing good money after bad. Even more striking, the Chief Economic Advisor doesn’t believe that finding the necessary capital for PSBs is a big deal- he thinks it’s “the easiest part” of the loan resolution problem. (“Rehab for the balance sheet”, <i>Indian Express<p>, February 8). Only, the Survey doesn’t favour promising large infusion of capital to PSBs <i>before<p> bad loans are resolved. This, it believes, would create incentives for unduly large write-offs.

So, none of the issues associated with bad loan resolution in the present scheme of things goes away with the creation of PARA: Coordination amongst banks; large write-offs and the potential for controversy; and the substantial capital that would have to be infused into PSBs.

If anything, we stand to lose two advantages we have with the present system. One, banks’ intimate knowledge of projects and hence the ability to arrive at the right resolution. Two, banks’ ability to use the leverage they have with large corporate groups to ensure that they restore viability to troubled projects within the groups.

If the primary motivations for PARA are to have the right incentives for write-offs and to get resolution going, there’s a simpler option: create an oversight mechanism for vetting bad loans. The Survey mentions that the Banks Board Bureau has created such a mechanism — we don’t know whether it’s operational. We need to merely strengthen the mechanism by getting one created through an Act of Parliament.

In sum, it’s not clear that setting up a new agency is a superior way to address the issues that bedevil bad loan resolution. Giving PSB management statutory backing to resolve bad loans and the capital infusion to cover write-offs could achieve superior outcomes.

Still, there’s merit in trying out competing models. Let’s walk on two legs: facilitate better resolution under the present system and set up PARA as well by transferring loans amounting to, say, ~1 lakh crore. Let’s see which model does better. There could be useful lessons to be learnt.