NEW DELHI: Days after announcing the mechanics of the bad bank that will remove ₹2 lakh crore of bad debt from the books of banks, and weeks after announcing a framework that will make more people eligible for loans and scrapping the retrograde retrospective tax, finance minister Nirmala Sitharaman discussed these, and the state of the economy, in an extensive interview. Edited excerpts:

You announced on Thursday that the government will provide ₹30,600 crore in guarantees to the National Asset Reconstruction Company Ltd to buy ₹2 lakh crore of bad loans from banks. This will be in a 15:85 split, with NARCL offering banks cash for 15% of the value of the assets and issuing security receipts for the rest (partly guaranteed by the government), which the banks can sell in the market. Do you think there will be appetite for these securities?

Yes. That these assets have been sitting without resolution need not give us the impression that they have no value. The resolution formula is the one that will be given priority. Not liquidation. When you look at resolution – there is an implicit message being given that these are workable assets, and that with some doing they will be valuable.

There will definitely be interest in the market.I lay a lot of emphasis on the professionals (managing the assets), which is why, along with NARCL, we have set up India Debt Resolution Company Ltd. It will have panels of experts; panels because the assets belong to various categories. These panels will deal with assets in domains in which they have expertise. With that kind of specialised application of mind on each of these assets, we think they will be made up in such a way, and valued in such a way, that the market will find it interesting. Bank officials do not have that kind of specialisation.

IDRCL is key to this, right?

IDRCL is 49% owned by the banks themselves; the Indian Banks Association will have to drive the process as these assets belong to the banks; IBA will have greater oversight on this. It is in their interest to have these run efficiently.There’s also a fee (against the guarantee) that NARCL will have to pay (to the government); the fee becomes higher with time; so the sooner you sell an asset, the better it is.

Are you confident this will work?

Yes, because this entire mechanism was driven by the banks; many of these big-ticket exposures are through consortia; unless all banks agree, no resolution is possible. Now because it’s through IBA, it’s for them to constantly keep moving towards better resolution, towards consensus.

So something we have all been talking about for ages — a bad bank — is finally here.

In a slightly different formation which will be a lot more transparent and owned by the banks themselves. In a country like the US, 99% of the banks are private. In India you have the public sector holding a big share.

Is this a transient mechanism?

At this stage, we are not describing what happens after five years. ₹2 lakh crore will have to be cleared in five years. Beyond that I envisage that the banks themselves will be professional enough to figure out how they are going to handle their non-performing assets. If at that time — small asset reconstruction companies are not able to handle assets over ₹500 crore, and that is why we said this mechanism is for assets of ₹500 crore and above — there is a need to continue with this for larger assets, they will continue.

The misuse of a section of the Insolvency and Bankruptcy Code (IBC), where creditors agree to take huge haircuts, sometimes in excess of 90% on even good underlying assets, has resulted in demands for strengthening the law. Do you agree?

Yes and no. Where the haircuts are so significant, I think some banks have also been sitting up and saying we can’t accept this. In one recent case that resulted in a 98% haircut, I was glad that two banks voiced dissent, and they also probably went to the court and sought a stay. Such course corrections highlight that the weakness is not IBC itself but in the way the issues are being resolved. So I would look for a solution to that rather than tinkering with the act itself. Where amendments are required to strengthen the act, I am in favour of them. But in practice, if there are ways in which people are either gaming it or conveniently giving an inference that is, in spirit, not in line with the law, I think other ways of legal redressal are required. It is not a weakness in IBC but in how people are gaming it. So we will have to see both – I am happy to strengthen IBC because it is one of the better ways of resolving; it focuses on resolution of a going concern rather than liquidation.

India recently announced the launch of Account Aggregators (AAs allow individuals and enterprises to share credit and financial information relating to their accounts or transactions with one financial or service entity with others, with their explicit permission, so as to prove their credit worthiness) which could broaden the credit base even as it makes it easier for financial institutions to lend. How do you see the acceptance of these?

The small and medium enterprises and the middle class will benefit from this. We are all worried about data privacy, and while there is a data privacy law that will come, taking this avenue to provide comfort to borrowers has been received well. I think the fact that people have grasped the details of AA shows that people are willing to see how it helps optimise the system.

Are nudges required? AAs will become stronger only if more organisations with which people have dealings, telecom companies for instance, become part of the network.

Nudges are required for many things the government is doing – even small digital adaptations that people have to do. A lot of small nudges have been happening in the past year, and that is evident in the way UPI (United Payments Interface) has been growing – we are extending it to overseas Indians now. The AA framework also needs a nudge. This is a great leap forward.

But like you said, a privacy law and a data protection framework are needed.

Necessary consultations will have to happen. They can’t be bypassed. If the stakeholders are brought on board; [if] their inputs are used to strengthen the law – then there is greater acceptability when it is passed. I don’t think there will be a delay; the more the consultation, the better it is. That process will be done.

India has been ahead of the curve on many things – UPI, for instance, and AAs, but seems to be lagging behind on adopting cryptocurrencies.

It may not be the best example, but take El Salvador. The way in which they went ahead to accept it (Bitcoin) as a currency. You’d think common people don’t care about digital currency; but the public took to the streets against the move. It’s not a question of literacy or understanding – it’s also a question of to what extent this is a transparent currency; is it going to be a currency available for everyone? El Savador may be an exceptional place where they tried some experimentation. There are other countries that are talking about the central bank having a legitimate cryptocurrency. That could be a possibility.

A lot of consultation took place; RBI’s views were also taken; now we have to formulate this in the form of a Cabinet note on the balance we can strike. This is not an era where you can say I don’t care about what’s happening, or we don’t want to do anything. At the same time, are we yet ready to go the El Salvador way? We have to be sure that a futuristic thing can’t be shut out.

I remember one edit writer for Mint suggesting four-five years ago that we should have our own Bharatcoin.

We have to evolve something suitable for our systems. India has the strength of the technology; fintech gives us the command over the instrumentalities with which you can play; our economy is full of possibilities. So we have to be cautious; but we have to think it through.

You recently scrapped the controversial retrospective tax and also offered a resolution for companies slapped with this tax. What has been the response, especially from companies such as Cairn and Vodafone?

It’s been positive. We have had a round of discussions and haven’t heard any voices of discord. One of them had paid, and the government will have to pay them back but that should close the chapter, we shall not pay interest, etc. And they should end all litigation. Those details are being worked out.

Vodafone is also a shareholder in Vodafone Idea, which is a beneficiary of the telecom package your government announced recently. Do you think enough has been done for the sector?

Definitely. The way in which the package has come – it also brings in reforms. It removes a lot of anomalies, and constraints. Business has been given space to breathe. Government wants that sector to be run in a free manner and also have more than two or three players. For free and fair competition, markets should be given play; and customers will benefit.

But with companies being allowed to pay some of the amounts being deferred under a moratorium through equity, the government could end up owing chunks of Indian telecom.

I think it will be a special undertaking (a company set up for that purpose), not the government.

Are you happy with the pace of economic recovery?

I’m happy to see recovery; at this stage we want to have very positive signs from all segments so that mutually they create this thing called sentiment. If sentiment becomes positive, it creates a multiplier effect.

What is your take on the growth vs inflation debate?

I don’t think they are mutually exclusive. It is possible to have some level of inflation without affecting consumers. And growth need not be curbed because of inflation. Our push for growth will continue.

At last week’s GST Council meeting, it was decided the timing for moving fuel under GST was not appropriate. When will it be?

To a large extent, that depends on states feeling comfortable. States feel that they have very few items on which they can have a consideration to increase or decrease tax. Tax on fuel, liquor are in their hands. They feel that at this time they need to have revenues, and reach a level where they can let it go. I wouldn’t want to push states at a time like this. A post-Corona situation is not the kind of circumstance in which any state will have a comfort level (with doing this). At this stage, I am also not holding back any money that is due to them; and we are also ensuring they can borrow more.

You have extended the cess but states have been asking for an extension on compensation, which under the GST Act ends next year.

In the 43rd council meeting in October 2020 it was decided that the borrowing undertaken to meet the compensation can only be paid from cess, so it needs to be extended. Those amounts borrowed last year, and the amount we have to borrow this year despite higher revenues and paying up the dues — just to pay back the borrowed amount, we need to continue cess till March 2026. By law, compensation can be paid from cess at 14% for five years. This is being duly complied with. Beyond 2022, compensation need not be given, but cess has already been extended for paying the loan already taken till 2026. Where is the possibility of extending compensation?

So, there will be a shortfall in compensation this year also?

There will be a little shortfall in compensation, and this year also we will have to borrow.

Will you follow the same formula as last year?

Yes, we will.

Coming to the issue of excise on fuel, would the government consider cutting excise to bring down prices?

The only very strong case for me to put forward – excise levied by the Centre is not value added; it is fixed. If it were value added, each time the price increases, it goes up. And prices are going up. So, I have to balance this with what’s happening in the states (Editor’s Note: Tax on fuel levied by the state is value added). It’s also a question of time. I won’t be able to comment on it beyond that.

Do you worry about a possible taper tantrum and money exiting Indian markets if interest rates overseas are raised?

There’s no point worrying; it’s more for the government and RBI to keep watch and smoothen any impact here; you can sense it in time if you keep a watch. There is a conscious effort to do this by RBI and the government. We are keeping a watch.

There’s been a push by some countries to have India agree to net zero commitment on emissions. This could have an economic impact. What are your thoughts on this issue?

The principle that the defaulter should pay holds good. The legacy units we may have are still not of that volume as that, which ages ago, the developed world benefited from; today, they can say these are environmentally unfriendly. If countries like us have to meet our development requirements, you’d still have to have some thermal units; coal dependence will be there to some extent. We are committed to closing legacy thermal units that are inefficient, coal guzzlers which have poor productivity levels, but completely removing thermal is impossible. Our economy has different regions at differing levels of development. We still have active mines. India speaking on this should be taken seriously because the PM has invested and is committed in renewable energy. Till now, what we have achieved in terms of our commitment in COP 21 have all been achieved with India’s own funds. That $100 billion supposed to be given to developing countries (by developed countries) has not even materialised. We have completely fulfilled our commitment in COP 21 but I don’t think we can rush into net zero.

Last question. Are you satisfied with where India is now?

I feel reassured. Indians have faced it all (because of Covid), have suffered, and have shown grit to come out of it. How much ever you do — and our government tried doing as much as it could – will not be enough. This is the kind of pandemic the world has not seen before, so I am willing to hear everything people say of what we could have done [better] and so on. But I am immensely grateful to the people of India. And looking at the way the vaccination drive is progressing, I feel we will come through it.