RBI’s thrust on cleaning up the entire system off bad loans has had very positive ripple effects, as India’s entrepreneurs are now raising more equity, and bearing consequences of their erstwhile reckless actions. In an article featured in the Indian Express, Manish Sabharwal, Chairman of Teamlease Services says that RBI’s thrust on NPA resolution is making Indian economy ‘fairer, less corrupt, and more innovative.’
This step by the RBI has added to its reputation of being fair and competent, as now all banks are being treated equally. “India is best served by a central bank that continues to talk less, takes the long-term view (daily banking system balances are up by more than Rs 2 lakh crore since last November), and aims to be successful rather than right,” Manish Sabharwal wrote in the same article.
RBI’s NPA reform push has also made Indian entrepreneurs to make the shift from Return Before Equity- “the money left from over-invoiced projects funded with nationalised bank loans after you accounted for the bribes to get the loans, real capital expenditure and your official equity contribution,” to taking a Return on Equity approach, says the author. Explaining the concept of Return Before Equity the author quotes a business tycoon as saying, “I’ve got a Rs 3,000 crore loan disbursal today; I’m a cash rich company.” Manish Sabharwal rightly observes that, to that tycoon, the difference between liquidity and solvency was an alien concept.
According to the author, passing of the Insolvency and Bankruptcy Code (IBC) by SEBI has had very important consequences, as it now separates financial and operational viability, ensures high negotiating human capital for borrowers, and uses deadlines to prevent bankruptcy being perpetual or terminal.
RBI’s step will help in freeing up government finances from nationalised bank recapitalisations. However, private ownership alone is no guarantee of prudence, the author observes, giving the example of the global financial crisis. According to him, India needs lasting solutions to the problem, as government finance is limited, and can be used more efficiently by deploying them in areas with greater need.
Summing up the benefits, the author says that- “India’s entrepreneurs are already raising more equity (debt to market cap is declining), bearing more consequences of their actions (I own 20 per cent less of my company than I could have because of an arrogant acquisition that went wrong) and earning or raising equity rather than borrowing or stealing it.” In conclusion, Manish Sabharwal quotes Mahatma Gandhi- “Lord Mountbatten once told Gandhiji that fear is contagious. He responded, “So is courage”. Banks must seize this policy window created by policy courage.”