On-Time Payments Can Drive High Growth

Lacklustre trend growth calls for attention to the economy, with less distractions, diversions, and disruptions. Government can lead with payment on time. 

Shyam Ponappa | September 1, 2022 

India’s economic recovery from the recent slump offers hope of reasonable prospects for the future. There are other encouraging factors that bolster this expectation, such as the reduction in the non-performing assets (NPAs) of banks. Yet, there is the sobering reality of a number of counterpoints that give pause. 

Warnings about constraints limiting average growth to 5 per cent annually arise from many factors: 

- Bank NPAs at nearly 6 per cent are still well above prudential norms. 

- Unviable government overdue payments, the unacknowledged counterpart of NPAs (more on this below). 

- Electioneering practices that are socially disruptive and financially ruinous. 

- Low proportion of women employed (20 per cent). 

- The need for increased provision to improve access to better jobs, either by migration or by remote access. 

- The need for improved digitisation for quality and output, including clean, secure databases. 

- Government interference that decreases public sector productivity and performance. 

- Uncertainties and disruptions from external threats (border tensions/clashes, and global disruptions of critical supply chains). 

Some factors are beyond policies and regulations, while others are not. What realistically could be the expectations of government policies and actions? An annual average of 5 per cent (only)? Or could it be higher, as we need it to be? 

The chart shows recent annual growth rates since a peak of 8.26 per cent in 2016.

The annual average since 2016 is 5.19 per cent, which means growing at 8 per cent for the next three years will yield an average of only 6.03 per cent since 2016. Even growth at 9 per cent annually for the next three years will result in an average of 6.33 per cent for the period. Realistically, if the government and the rest of the country do some right things, an average 5-6 per cent is all that is likely. While this is indeed sobering, it signals the need for serious attention to the economy, and less distractions, diversions, and disruptions. 

Payment Discipline & NPAs 

There are of course broad, interlinked reforms needed in many areas, such as in farming, the judiciary and dispute resolution, trade protectionism and tariffs, and so on. But there is a simple, fundamental change required that is essential if India is to genuinely address “performance” instead of maundering its way to “non-performance” as in the case of NPAs (i.e., non-performing assets), which, however, for some reason doesn’t happen. This simple change is performance of timely payments by government and government-owned entities. 

On-time Payments Can Drive Higher Growth 

Three years ago, this column explained how overdues lead to NPAs, and more broadly why a fundamental change is required in adherence to payment discipline.1 While much has been made of NPAs being unacceptable, there seems to be a tacit acceptance of government and public sector overdues. Whereas government overdues are like the counterpart of NPAs, reflecting government non-performance of payment obligations. The Central Repository of Information on Large Credits (CRILC) for collated data on bank loans and NPAs was created in 2014. Until then, such data had to be obtained from diverse sources. But there is no matching single point access to payments due and overdue from government and public sector entities (central and state). The power ministry’s portal from 2018 (praapti.in) is an exception, as is the Samadhaan portal for micro, medium, and small-scale enterprises (MSMEs) of the Ministry of MSMEs from 2017. 

For electricity, at the end of July 2022 state subsidy overdues to distribution companies (discoms) were reportedly at Rs 75,000 crore, while total overdues to generators and discoms was Rs 2.5 trillion. Regarding government overdues to MSMEs, nearly 100,000 applications had been filed in the four years to October 2021. A press report in October 2021 cited an estimate of overdues to MSMEs of Rs 1.5 trillion. 

Bank NPAs were finally addressed in 2014-2015 by the Reserve Bank of India (RBI) enforcing existing regulations to clear dues or be classified as NPAs. For most enterprises, this was like being sentenced to the guillotine. While this appeared draconian instead of calibrated attempts at restructuring, arguably, developments thereafter may justify the recourse to harsh methods. 

Less drastic ways are possible, just as restructuring stressed loans through effective processes and timelines is possible, but only for viable projects, and not without difficulty. This is the alternative to overdue bank loans being declared as NPAs, followed by bankruptcy and distress sales. An example of the effect of this blunt instrument occurred in 2019 to a number of power generators and distributors. There were 34 power producers with viable projects who had unpaid dues from electricity distributors, or were facing coal supply problems, or were in the process of restructuring loans. Classified as defaulters after the RBI-mandated 180 days regardless of the cause, they had to seek judicial relief. The Supreme Court quashed the order that gave rise to this condition, i.e., the RBI Circular of February 2018. 

Others had a worse fate, such as a major construction company whose receivables far exceeding its debt were overdues from major public sector companies, but suffered severe financial distress because it could not service its debts. 

For government dues, it would be far more preferable to institute a credible, calibrated and systematic process, including real-time monitoring and penalties (with minimum discretion), rather than adopting the guillotine approach. This is because the cost of the resulting economic shut-down has to be avoided if at all possible. Similar real-time processes and systems could be set up for bank loans for NPAs, and to prevent overleveraged borrowing. Uncollated data on government dues are already in the goods and services tax system, as detailed in this article two years ago.2 Fundamental changes in operational standards are essential for on-time payments, with penalties (penal interest, with restrictions on borrowing), with strict enforcement for non-performance. Central and state governments have to provide the lead on this necessary aspect of governance. 

Just getting cash flows on time would probably be sufficient for India to grow at well beyond an annual average of 5 per cent 

Shyam (no space) Ponappa at gmail dot com 

1: https://organizing-india.blogspot.com/2019/04/delayed-cah-flows-and-npas.html; 

https://www.business-standard.com/article/opinion/delayed-cash-flows-and-npas-119040301417_1.html 

2: https://www.business-standard.com/article/opinion/clearing-dues-from-the-government-120100601684_1.html

Kick-Start the Economy with Cash Flow & Connectivity

Pay government dues and enable high-speed connectivity.

Amidst the welter of problems the government is dealing with, one hopes that the removal of restrictions and lockdown status are being thought through with expert inputs and analysis. We can conjecture on the priorities for economic revival, and here is a short wish list.

Cash flows have to start for any downstream problems to be addressed, without questioning that a major remediation to India’s lockdown trauma is providing food and shelter to stranded workers, and getting them to where they want to go. Many will scatter from their work or holding areas back to their homes. What’s needed for economic revival is the opposite: For workers to return to work and resume productive activities. But this may be unrealistic to expect after the loss of confidence from the shocks of the peremptory lockdown, the deprivation of livelihood, and of food and shelter.

Other stranded people who have the means also need the right to move freely while maintaining prudent constraints. Indians abroad are being flown home; Indians in the country need facilitation too.

Next on the list is restarting the economy by ending the forced closure of productive activity for compensation, spending for products and services, and of economic flows. Recall that before the lockdown, we had a monumental late-payments problem, namely, the non-performing assets (NPAs) of the banks and financial institutions. While there has been considerable scrutiny of the NPAs and fraudsters, much less attention is directed at a major component — that is, late payment of dues and refunds by government and its agencies. These encompass all payments, such as to state and private electricity generators and distributors, airlines, hotels, restaurants, manufacturing companies and service providers, and all refunds of taxes, including goods and services tax (GST) and customs duties.

Source: https://www.eulerhermes.com/en_global/economic-research/insights/In-line-with-the-economic-slowdown-companies-preemptively-reduced-payment-delays-except-for-Mediterranean-countries.html

This aspect escapes corrective action despite its magnitude, although it is remediable through decisive action. It has to be resolved through executive intervention, because it is a precursor and cause of a significant proportion of NPAs.  Among larger commercial enterprises, late payments are a problem for some countries more than others, as seen in the heat map for 2018 by Euler Hermes, a trade credit insurance company (see chart). Surprisingly, India has a reasonable rank of 24 out of 36 countries, and its average at 67 days is close to the overall average of 65 days. Also, 25 per cent of corporations paid before 30 days, although another 25 per cent paid after 96 days. China had the highest average at 92 days, followed by Greece, Italy and Morocco.

However, smaller enterprises suffer considerable delays, as represented to the finance minister before the Budget recommendations in January this year, because their receivables take months to clear.

The biggest problem is not reflected in the chart: It is in delayed government payments and tax refunds.

All the delays have a cascading effect resulting in NPAs. For instance, Nasscom complained in 2017 that overdue payments from central and state governments and public sector undertakings for IT projects amounted to nearly Rs 5,000 crore. A survey is under way on the present status. Another example is delayed subsidies to fertiliser manufacturers that are notorious for creating cash flow crises. A third example is large dues and contested payments owed by the National Highways Authority of India (NHAI). In August last year, the NHAI was the focus of an effort by the Prime Minister’s Office (PMO) to clear its enormous debt overhang, and its contested dues.

Yet, the government resists timely payments even towards public sector dues, while being remorseless with its charges and collections. It is as though there is no understanding of cash flows, except perhaps for election funding. Overdue government payments are an obvious starting point to clear NPAs and create confidence through liquidity, emulating what is already practised here by India’s best corporations.

Another inexplicable impediment is the totally conflicted approach to information and communications technology (ICT). As the past two months have shown, reviving and remodelling our economy depends on effective digitisation and communications for two streams. One is for more efficient production and service delivery in all areas, such as agriculture, dairy farming and horticulture, and so on, as well as finance, manufacturing, trade, logistics, tourism, and in compliance. The other is in functioning in an altered paradigm that depends on effective support for remote working. Yet, telecom companies and high-tech manufacturers are beset with overdue payments on the one hand, while the former are crushed by government charges and retrospective demands. Meanwhile, a failed approach of high-priced spectrum auctions continues, while the most elementary and logical regulatory reforms for wireless broadband are ignored, such as enabling 60GHz and other spectrum bands discussed below.

Is it possible that the authorities do not understand that without wireless reforms, India is just holding itself back, or are they simply not acting on what they know? Consider what other countries are doing to improve productivity. Last month, America opened up the entire 6GHz band consisting of 1,200MHz of spectrum for unlicensed use for faster Wi-Fi.1 Licensed primary users of microwave for backhaul, utilities, and public safety were protected. The EU countries are likely to follow soon. For India, following this lead for Wi-Fi is a foregone conclusion. Dithering because nobody in power cares to even follow feasible measures wisely will only hold India back, as in disallowing the use of unused spectrum bands (60GHz, 70-80GHz, and 500-700MHz).2

If only the PMO would task appropriate authorities to consider permitting the use of four bands, namely, 60GHz, 70-80GHz, 500-700MHz, and 6GHz, the likelihood of better connectivity for high-speed broadband countrywide would greatly improve. The first three bands would be for licensed operators excepting indoor use of 60GHz, and the fourth would be for Wi-Fi. Such action will comply with the Supreme Court’s requirement of having public-interest policies in place for not auctioning spectrum.

Acting on cash flow plus connectivity, both initiated by the government, can effectively kick-start the economy.

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Shyam (no space) Ponappa at gmail dot com

1: https://docs.fcc.gov/public/attachments/DOC-363945A1

https://www.theverge.com/2020/4/23/21231623/6ghz-wifi-6e-explained-speed-availability-fcc-approval

2: https://organizing-india.blogspot.com/2020/03/indias-self-goal-in-telecom.html

Delayed Cash Flows and NPAs

We need to rid ourselves of a tolerance of delayed payments to avoid their consequences.

Shyam Ponappa   |   April 4, 2019

Many of us in India become inured to a laxity in standards and to the implementation of laws. There may be good reasons for targeting one of these for a start, and that is delayed payments. These are broadly tolerated by citizens, farmers, corporates, small businesses, and government agencies. Perhaps this is because payment delays are merely one among several instances we encounter of mediocre standards, indifferent quality, or shoddy performance. Delayed payments are the inception of process flow problems that lead to non-performing assets (NPAs). Perhaps delays in cash flows are a fundamental flaw in our processes that we need to fix as a root cause that drives much else, to begin to address a gamut of inadequacies.

To see why, consider delays in government payments. Central and state government payments are often delayed, apparently even more than in the private sector. Even government payments related to high priority IT systems, for instance, are notoriously delayed. Major IT companies complain of losing money on large projects for this reason. Nasscom estimated a couple of years ago that government dues to the IT industry could be more than Rs 5,000 crore.

Some factors that render domestic projects attractive to the IT industry are the large domestic IT market, projects of significant size from state and central governments, and slowing exports over the last several years. The disincentives, however, are lower margins, long lead times for government contracts, payment delays, and a history of disputed payments and litigation. Also, IT majors complain that government processes often don’t accommodate changes in the terms of contracts when there are changes in the scope of projects. This is why IT companies are averse to domestic government projects.

Quite apart from these opportunity costs, delayed payments create serious cash flow problems for the economy, with outstandings running typically for many months, and sometimes for years. While the instances above are about the IT industry, there are similar problems in other sectors as well. In the construction industry, for example, estimates of private contractors’ dues held up by delays including disputes range from Rs 1 trillion to Rs 3 trillion.

While some bank NPAs undoubtedly result from fraud and malfeasance (which are outside the scope of this article), disruptions in cash flows in commercially sound projects can result in the creation of NPAs. This aspect has to be addressed as a precursor to stressed assets in resolving NPAs, as is evident in considering the problems of power generating companies.

A Ministry of Power portal (http://www.praapti.in/) shows that overdue payments from electricity distributors to power generating companies at the end of January 2019 amounted to Rs 28,504 crore. Meanwhile, in the Supreme Court, 34 power generating companies with NPAs of Rs 1.4 trillion were battling an RBI Circular of February 12, 2018, that consigned their entire investment of double the NPA amount (Rs 3 trillion) to bankruptcy proceedings under the Insolvency and Bankruptcy Code (IBC). The reason was that their dues had not been resolved within the RBI-mandated 180 days by August 2018. The RBI insisted on bankruptcy as a time-bound consequence, regardless of the cause of default. By contrast, the Ministry of Power and the supplicants objected to the RBI Circular, attributing loan stress in several cases to factors beyond the borrowers’ control. These factors included reasons such as payment delays by state distributors, problems in the supply of coal, or in some cases, because consortiums of lenders were close to restructuring loans, whereas declaring bankruptcy would not resolve the underlying causes.  A number of bankers suggested that the 180-day rule for bankruptcy in the RBI Circular was impractical. Major banks consider restructuring as the appropriate solution when defaults are caused by factors outside the borrowers’ control, such as delayed payments from state electricity boards or by government agencies, state government overdues, or major adverse changes such as the unexpected imposition of duties by supplier countries on coal.

The Supreme Court quashed the RBI Circular of February 2018 on April 2, 2019. This will likely pave the way for more constructive outcomes for many of these projects, provided the RBI and the banks follow through with feasible restructuring. The alternative of selling stalled projects that were unworkable because of reasons such as there being no fuel supply or power purchase agreement, or overdue payments by customers (state or central agencies) were outstanding, if indeed buyers could be found, would hardly solve these problems. The projects would remain stalled or unproductive until the underlying inadequacies were made good, whether by providing fuel, power purchase agreements, collecting overdue payments, or enabling realistic tariffs to yield viable margins. Until these deficiencies are made good, the problems will remain.

Popular opinion, however, seems to favour “selling off bankrupt projects” regardless of extenuating circumstances, even when owners have no control over them, although selling them will not rectify the conditions that created the default. This approach of attempting to sell off projects to get rid of problems without addressing the underlying issues for otherwise sound projects is best abandoned. To be flip, it’s like an “Off with his head!” approach.

What’s needed

Standards for on-time payments are the real requirement, with penalties, e.g., double the SBI rate, enforced strictly for non-performance. Central and state governments need to take the lead on this as an essential aspect of governance. These difficult steps will be a real bear, but are necessary if we are to eliminate NPAs. Is this a realistic expectation? As realistic as it is to expect to eliminate the resulting NPAs.

The RBI will need to provide regulatory oversight, instituting real-time monitoring and reporting systems, and taking prompt action as necessary. Properly designed and deployed, such systems would prevent one form of ever-greening of loans at inception. Separate systems for loan renewals could be designed and deployed to prevent other aspects of ever-greening. These coordinated steps could prevent good assets from turning into NPAs.

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Shyam dot Ponappa at gmail dot com