Wednesday, September 23, 2020

Editor's Space

Skinny Dipping

Maverick investor Warren Buffet famously observed, “After all, you only find out who is swimming naked when the tide goes out.” He was alluding to skinny dipping without any assets in a financial tide. Now that India’s financial tide has ebbed, it has left a flotsam of NPAs from Corporate India Inc, leaving the banks and government embarrassed, clutching to the recaptialisation Fig Leaf for cover. This needs to be seen in context of previous attempts at recapitalising Indian banking. The Rs.2.11 trillion recapitalisation package has essentially two components, A Rs.76,000 crore outlay from existing resources. Of present budgetary allocation for bank recapitalisation this fiscal, Rs.18,000 crore will be “released,” and balance Rs.58,000 crore will be raised from stock markets. Typically, this cash infusion takes two forms; government purchases bank equity, preference shares, or similar instruments. India tried this mechanism in early 1990s. The second option involves buying stressed assets from banks to give them a clean balance sheet.


But is recapitalization really costless. Between 1994 and 1998, bonds officially titled “10 percent GOI Nationalised Bank Special Securities 2006,” worth Rs.20,446 crore, were issued to 19 PSU banks. In 2002, these recap bonds were restructured into perpetuities, in 2007 they were restructured into marketable securities of 15, 20, and 25 years’ tenure. These marketable securities (total value Rs.20,808 crore) are still outstanding, with annual interest outlay at approximately Rs.1712 crore, to be redeemed at face value in 2022, 2027, and 2032, respectively. Bonds amortize cost of recapitalisation in long term, so they are not costless. There is no free lunch. A recurrence of NPA crises within two decades shows that banking sector policies require a major overhaul.


Augean Stables

Current NPA and recap crisis was consequence of crony capitalism. It was ex-RBI Governor Raghuram Rajan, who did a thankless job of cleaning Indian bankings’ Augean Stables full of NPAs, by forcing their resolution.

As suggested in my November editorial, am happy to see revision of India’s Insolvency and Bankruptcy Code (IBC), on anvil. It will clean Augean stables by disallowing defaulters from bidding for their own NPAs up for rebidding, effectively precluding crony capitalism.

Looking forward to meet you at EXCON 2017 at our stall — Hall No. 4, Lower Level-N 387 between 12 – 16 December 2017 at BIEC, Bengaluru

Leave a Comment

Email Address
(will not be published)