FE Best Banks Awards: Paving the way for finance 101

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Updated: December 22, 2017 4:51:12 AM

Unlike bankrupt companies and rich promoters of the past, a genuine wiping out of equity of existing promoters seems to be the way forward

FE Best Banks Awards, finance 101, Insolvency & Bankruptcy Code, Arundhati Bhattacharya, state bank of india, Uday Kotak, Kotak Mahindra Bank, Sajjan Jindal, Leo Puri, UTI AMC, NCLTFE Managing Editor Sunil Jain ranged a volley of questions for an august panel on the raging ‘Insolvency & Bankruptcy Code’, it was clear that a level playing field for errant promoters to come back in the game is still a far cry.

To bid, or not to bid. That was the vexing question bankers and industrialists were confronted with around stressed assets at the FE Best Banks Awards held in Mumbai’s Four Seasons recently. As FE Managing Editor Sunil Jain ranged a volley of questions for an august panel on the raging ‘Insolvency & Bankruptcy Code’, it was clear that a level playing field for errant promoters to come back in the game is still a far cry. Edited excerpts.

Sunil Jain (SJ), Managing Editor, FE: Uday, the banking environment today is very different from what it was a year ago. So should promoters be allowed to bid for their companies or is the government being unfair?

Uday Kotak (UK), Vice Chairman & Managing Director, Kotak Mahindra Bank: The issue is now that the law is in place, how does the process work. The key question is that for the larger assets, we see a number of bidders coming in, particularly for the steel assets. But, what about the mid-market and the SME assets? What happens if there is one or no bidder? In that situation, how do you make sure that the process of bidding is fair? And does it make sense, if not in the first round, at least in the second round, whether we should have different criteria. That’s something which I would seriously think about.

SJ: You think the government should, let’s say if the first round of bids are not very good, then maybe, look at the promoters coming in the second round?

Arundhati Bhattacharya (AB), former Chairman, State Bank of India: One of the reasons why the resolutions weren’t taking place was because of the ‘moral hazard’. It is because of this that this ordinance has been brought in. Now what is the moral hazard? The moral hazard is that the same people who could not run a company, for whatever reasons, that they would get it back at a much lower price. So the moral hazard is
that others who may not have that same problem, may then, deliberately do things so that they can also go out and pare some of their debts and come back. That’s the moral hazard. And it’s because of that moral hazard that this step has been taken. However, we must also remember that the world over, there is no such step and it is felt that when a company gets into trouble, it’s because of genuine reasons. It’s not something that’s manufactured or engineered, or whatever. In India, there is today a deep distrust in whatever is happening and this ordinance is an expression of that to ensure that the trust comes back into the whole system and people actually do what they are supposed to be doing and not something else. As Uday says, maybe going forward, as we feel that things are working properly, that there are more checks and balances in place, that we are actually able to track why a company went under, that the things that have been put in place today, we may see its evolution.

SJ: Sajjan, if promoters don’t bid, will that lower the value of the bids?

Sajjan Jindal (Jindal), Chairman & MD, JSW Group: I’ve been tweeting about it and I have a little different view. The promoters are allowed to bid if they are not willful defaulters, which is fine. But in our context, I felt that if somebody who borrows a lot of money from the bank and sets up the industry and due to his fault or due to circumstances, he is not able to fulfill the obligations for the banks and then he goes and buys that asset at half the value, for example, then I don’t think we are setting the right standards. So when somebody is working hard and paying every rupee back
to the banks and his competitor gets a 50% discount and comes back and sits alongside, then the first person also feels cheated. And then, he says, ‘Okay, I’ll go to NCLT and get it at 50%.’

AB: That’s precisely what I was saying. That was one of the reasons why none of the resolutions took place because of this particular moral hazard.

SJ: Sajjan, should there be something in the ordinance that says we will ban resale for, let’s say, five or 10 years because we don’t want a non-promoter to buy the company, but the promoter to have some kind of arrangement, and you never know what the arrangement is, frankly. And, four-five years down the line or two years down the line, I can sell it back. So should there be something to stop that? Or, do you think we are just getting carried away with too much of policing?

Jindal: Sell it back to the promoters?

SJ: Yes.

Jindal: I’m hearing that a lot of promoters are trying to bring some ‘face’ for the time being, and later on, they would come back. Too many regulations will create more problems, in my view, but once the government makes it clear that if you are trying to do something coming from a different face, I don’t think that is going to work. I have my doubts.

AB: If you have a lock-in for a very long time, it lowers the value as you are taking away liquidity. How do you distinguish as to who it is being sold back to, and again, the rigmarole starts. Having said that, I agree with Mr Jindal because the government has made up its mind and anybody trying to game the system, will not be appreciated. Anybody who gets into it would certainly not try to do something which would displease the government, especially when they know this is not the right thing to do. I believe that given the kind of clear signaling that the government has done, I don’t think that people will deliberately try and game the system.

UK: Two major changes are coming out of this process. The relative strength of the creditor versus the debtor has dramatically changed. For the first time in India, unlike in the past where you had bankrupt companies and rich promoters, you now have a system where you will see genuine wiping out of equity from companies of existing promoters as well, and that is ‘Finance 101’. If you take the whole hierarchy of financing, equity is the one which has to take the most risk and for the first time you are seeing risk capital taking the risk, unlike in the past where banks were technically lenders on paper but were taking all the equity risk.

SJ: Leo, should promoters be really allowed to bid?

Leo Puri (LP), MD, UTI AMC: An entrepreneur who carries out a business is taking on risks and sometimes those risks do not work out. In that context, to penalise them from being able to ever establish themselves in business again is not really in the spirit of capitalism. I think the concern in India is that we do not trust ourselves, our system to be able to differentiate between people who have actually defrauded the system and people who have miscalculated. Business carries risk and that is the whole point; entrepreneurship is a risk-taking enterprise and as you undertake risks, sometime you might fail. In the most successful economies, you will see lots of examples of entrepreneurs who failed, tried again and succeeded. In that spirit and for that reason alone, simply failing as an entrepreneur should not be, in my view, sufficient reason for preventing somebody from once again rebuilding a business and acquiring assets. I cannot go into the legalities of a willful default or a non-willful default. The way the ordinance reads currently, if I am not mistaken, is that if I have defaulted on any count, I am unable to bid for any assets. It seems quite extreme.

Jindal: I think what Leo is saying is what the fine print says that not only the promoter himself but his relatives or co-promoters, if anybody defaults, then he cannot bid. He cannot rebuild his business. So I think that is an extreme situation. But the government has decided to take an extreme position because they have seen that a lot of defrauding has happened in the system.

SJ: If the government gives the money to the banks and if the insolvent promoters are put out of business, are we heading to a situation where banks take over the assets of any promoter who is in trouble?

AB: I don’t think it works that way. There is no simple solution because at any point in time, the bankers will try and ensure that if there is a problem in a unit, it gets addressed as quickly as possible instead of allowing it to linger. One of the reasons why we could not do anything is the moral hazard problem, and that is why this amendment has been brought in to ensure that moral hazard does not exist. And because this has been brought about, most promoters fully realise that instead of allowing the grass to grow under their feet, as soon as they are into any kind of issues, they should approach the banker and try and ensure that their accounts are restructured and whatever needs to be done, is done in order to carry on the business and not get into an NPA situation. So there will be definitely a change in the way people do things. Whether from the promoters’ side or the bankers’ side, action will be quicker. So overall, I think, the efficiencies in the system will increase. The banks are also using more and more of technology to understand what is happening in the business and where the stress in the business lies. If the bankers build that capability in their risk management systems, they will be able to find out much more quickly which account is beginning to look stressed. And then they can take them through the process that will help to bring them back to health.

SJ: Do you think banks will lend to big infrastructure again? Or, will they be cautious and go for consumer loans?

AB: Banks will not have a problem with any project that is well prepared and presented. However, what are the issues that the banks had earlier? Earlier, for instance, a road project with a 30-year concession was expected to be repaid on an average time of 7.5 years. Now why should you insist on a road project being repaid in 7.5 years? Because the banks had only 10 year’s money. It is only recently that we have been allowed infrastructure bonds, which gives us 15 year’s money. So as per the asset liability mismatch of the bank, you could not take it beyond a particular point. Abroad, you are allowed a bullet payment at the end of that period and that amount is required to be refinanced after that. It happens regularly. That system was not available in India at all. Now it has been made available. You can’t have infrastructure, which is a 30-year asset being repaid in seven years. If the repayment does not happen during the stipulated period, the regulator says that is an NPA. It is not an NPA. It is just taking longer to be repaid. We have to be realistic about the repayment period. Bankers have to look very carefully into these projects to understand if all the approvals
are in place, whether equity is available on the ground, where is it coming from, are there any risks. So the risk assessment—what the bankers will do—will be of a different magnitude today from what it was earlier. So I don’t believe that banks will stop lending to the infrastructure sector. They will look for better organised and better conceived projects with a much better understanding of the risks.

SJ: Do you think some of the smaller banks have this capability? Or, is the government doing the right thing by saying start moving into a narrow banking focus?

LP: In India, banks under government ownership are never likely to be able to succeed. They have at least one hand tied behind their back. The fact that they have managed to do as well as they have done is a tribute to the talent that was inducted 25-30 years ago. They have carried these banks through despite all the handicaps that they faced. I am deeply pessimistic that these handicaps can be removed other than through a change of ownership. So I think we keep rearranging deck chairs on the Titanic. As far as the public sector banking system is concerned, it is a sinking ship and we are once again re-arranging deck chairs. Ultimately, unless you take banks out of government ownership, many of them don’t have a future at all. We need a guide path on how we can restructure them. Some of them can be acquired for their distribution, franchise. It has happened in many other countries where poorly performing banks were transitioned from the public sector into the private sector through a process of sale and restructuring. The primary reason given for the continuation of these banks is that certain tasks only these banks will undertake. I think that was probably true when Mrs. Gandhi nationalised the banks. We didn’t have widespread networks, we did not have financial inclusion. But now, post jan dhan, post inclusion, does anybody really believe that HDFC Bank, ICICI, Axis or even Uday’s bank, is not interested in serving every single segment of this country with the low cost of acquisition that technology provides? Look at payment banks, look at small banks, look at microfinance—so the argument that without the PSUs, you will not be able to serve a certain section of the population, loses its appeal.

SJ: Do you agree that PSUs have one hand tied behind their back?If the government gives the money to the banks and if the insolvent promoters are put out of business, are we heading to a situation where banks take over the assets of any promoter who is in trouble?

AB: It is really not a level playing field. That much I also agree.

SJ: They get a lot more money than you, we know. That’s one part of it.

AB: That’s not all, you know. The fact of the matter is the kind of talent that we need to induct, the nimbleness that we need to have is impaired because of the various processes that we need to follow. Of course, today it is all a question of the right kind of talent. Even in the villages, if you are looking at the microfinance model, it’s a very high touch model. Now that kind of high touch model if you try to do with people who have been recruited in urban areas, it does not work. What happens in the bank is that you have a common examination across India. And therefore, you have common cut-off marks. Now, how do I manage, where do I have the flexibility of doing a high touch model unless I can locally recruit? So there are many issues on the recruitment piece as well as the nimbleness that is required, which the public sector banks don’t really have. These are things that really need to be addressed. Now, whether they are addressed through ownership or whether they are addressed through other reforms, I am
not sure how it can be done. I definitely think the level playing field is now very important because things are changing fast. If you can’t keep pace, you are definitely going to be left behind.

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