ET BureauThe ground reality may be a lot less encouraging than the hype surrounding the Narendra Modi government, but one need not lose heart, says Jaideep Khanna, country head, Barclays. In an interview with ET, he says bankruptcy laws and lower government holding in banks may be essential for sustainable growth. Edited excerpts:
What is the mood in the corporate world? There is already some murmur about the government being slow on economic reforms?
There is a sense of optimism. There is anticipation. But the things on the ground have not changed dramatically. While the mood is better, for that to translate into investment on ground, into cash flows, it will take 12-18 months. Credit growth has to pick up. It will pick up when companies begin to commit fresh investments.
So, how do you see the economic growth trending in the next one and a half years?
We have seen the bottom in terms of growth. We have had reasonable monsoon. Forecasts are calling for higher GDP growth. The fact that crude prices have dropped has given a boost to government’s balance sheet and will also help contain inflation. There is more spending power in the hands of people. There are enough positives when you look at from a macro perspective. But there are some critical things that need to be achieved for a sustainable revival.
What are those critical things?
First is credit quality of financial institutions. It needs repair. There is a fair amount of capital required. The financial services industry needs repair. Second, a lot of the regulatory and governance issues have to be convincingly dealt with – be it coal, or dealing with the financial system. Markets need to sense that there is consistency and credibility to policy. At a more micro level, the market is keen to see the regulatory framework to throw out approvals… some greater sense of urgency.
Is it hopes belied for the corporate world, given that it is behind expectations?
I think significant reforms will come. Without significant reforms, the long-term sustainability of growth would be a challenge. Significant reforms don’t have to come on the first day. There are a lot of low-hanging fruits. Addressing day-to-day issues that companies deal with and clearing the challenge of unproductive assets in the system would help. Smoothening the system will deliver its own momentum. I don’t think the long journey has to begin with massive reforms, but can begin with small changes. I have not lost confidence.
What gives you the confidence that growth and reforms will come?
The alternative is too difficult to contemplate. India, as our prime minister says, has tremendous asset in its demography. The flip side of that is that if we don’t provide employment and growth opportunities for that very significant section of workforce, instead of becoming a demographic dividend, it would become a demographic disaster. So, I believe that the government understands the scale of challenge and they will address it.
What do you expect from the new government to facilitate sustainable recovery?
Land acquisition, and sanctity of public-private contracts. All of these are crucial to make the country more efficient. Focus on infrastructure, and governance. All of these are in the public domain and need to be tackled. Specifically, with regard to the financial services industry, a few things are important - the creation of an efficient bankruptcy framework. One of the challenges the financial services sector faces is the difficulty in repossessing viable assets. A robust framework will be helpful. Creation of a sustainable strong, vibrant private equity industry is essential. How do you address the management of a seized asset? Improving the velocity of capital will stabilise the financial services industry. Securitisation has completely stopped because of tax laws. Improving the velocity of capital either by pushing the bond markets or reviving some of the products that help capital churn is necessary.
Are they enough to prevent recurrence of events such as Kingfisher Airlines, and Bhushan Steel?
If you had had a robust private equity ecosystem, you can contemplate changing the management. You can contemplate whether the company can be viable. A number of management options would be available. Capital usage becomes far more viable. Businesses don’t become unviable, but it is the debt load that becomes unmanageable.
Many of the issues are hanging fire for decades. Is the lazy public sector banking a hindrance in the development of financial markets? Even the so-called smart private sector seems to be dormant.
I honestly don’t think there is such a big divide between the lazy public sector banks and smart private sector banks. The intellectual calibre in the banking industry in India is quite high. The failure of financial institutions in the country has to do with the commercial imperatives... Private sector is very clear to focus on shareholder value. Very aware of their share prices and focus on the multiples they are trading. Imperative in public sector banks is not always very clear. Sometimes, it is assets, sometimes infrastructure... For the long-term sustainability, profitability has to be a motive.
Should the government bring down its holding below 51% for a better focus and enable state-owned banks to raise capital?
There is a difference between what is politically achievable and what is necessary from an economic perspective. I think control can be exercised at a commercial level of less than 50% as we have seen in multiple cases in Corporate India. The promoter group holds less than 50%, but influences the direction, policy and objective of an institution. It is more politically sensitive. It needs political courage. If you do the arithmetic, the government will have to direct resources away from its other priorities such as infrastructure, health and into banks if 50% has to be maintained. It should allow its holdings to come down. But that’s a very difficult choice.
Global factors seem to be turning against Indian corporates with higher US interest rates roiling markets?
The joker in the pack is your hedging costs. The differential in nominal rates would continue to be high for a while. The cost-benefit comes from hedging costs. As India gets into an easing cycle and the currency gets stable, hedging costs should also come down. RBI has been examining why hedging costs in India are elevated. India is going to be capital deficit for a long time, so it is not just about marginal costs, it is also about the availability of capital.
Recently, we had the court rule against corporates in the coal block case. How does it affect the corporates and banks?
Relative to other challenges banks are facing, I think it is not enough in itself to determine their fate. It is an incremental challenge for banks that have lent against these licences.
We have seen some deals getting announced, but many getting scrapped in the same speed. What’s in store for the Deal Street?
A significant part of Corporate India is heavily indebted. It will take time to get deleveraged. Mergers and acquisitions would take time. Capital raisings have to happen. They are over leveraged because they invested for an economy that was to grow at 8%. But the economy didn’t materialise.
What is the mood in the corporate world? There is already some murmur about the government being slow on economic reforms?
There is a sense of optimism. There is anticipation. But the things on the ground have not changed dramatically. While the mood is better, for that to translate into investment on ground, into cash flows, it will take 12-18 months. Credit growth has to pick up. It will pick up when companies begin to commit fresh investments.
So, how do you see the economic growth trending in the next one and a half years?
We have seen the bottom in terms of growth. We have had reasonable monsoon. Forecasts are calling for higher GDP growth. The fact that crude prices have dropped has given a boost to government’s balance sheet and will also help contain inflation. There is more spending power in the hands of people. There are enough positives when you look at from a macro perspective. But there are some critical things that need to be achieved for a sustainable revival.
What are those critical things?
First is credit quality of financial institutions. It needs repair. There is a fair amount of capital required. The financial services industry needs repair. Second, a lot of the regulatory and governance issues have to be convincingly dealt with – be it coal, or dealing with the financial system. Markets need to sense that there is consistency and credibility to policy. At a more micro level, the market is keen to see the regulatory framework to throw out approvals… some greater sense of urgency.
Is it hopes belied for the corporate world, given that it is behind expectations?
I think significant reforms will come. Without significant reforms, the long-term sustainability of growth would be a challenge. Significant reforms don’t have to come on the first day. There are a lot of low-hanging fruits. Addressing day-to-day issues that companies deal with and clearing the challenge of unproductive assets in the system would help. Smoothening the system will deliver its own momentum. I don’t think the long journey has to begin with massive reforms, but can begin with small changes. I have not lost confidence.
What gives you the confidence that growth and reforms will come?
The alternative is too difficult to contemplate. India, as our prime minister says, has tremendous asset in its demography. The flip side of that is that if we don’t provide employment and growth opportunities for that very significant section of workforce, instead of becoming a demographic dividend, it would become a demographic disaster. So, I believe that the government understands the scale of challenge and they will address it.
What do you expect from the new government to facilitate sustainable recovery?
Land acquisition, and sanctity of public-private contracts. All of these are crucial to make the country more efficient. Focus on infrastructure, and governance. All of these are in the public domain and need to be tackled. Specifically, with regard to the financial services industry, a few things are important - the creation of an efficient bankruptcy framework. One of the challenges the financial services sector faces is the difficulty in repossessing viable assets. A robust framework will be helpful. Creation of a sustainable strong, vibrant private equity industry is essential. How do you address the management of a seized asset? Improving the velocity of capital will stabilise the financial services industry. Securitisation has completely stopped because of tax laws. Improving the velocity of capital either by pushing the bond markets or reviving some of the products that help capital churn is necessary.
If you had had a robust private equity ecosystem, you can contemplate changing the management. You can contemplate whether the company can be viable. A number of management options would be available. Capital usage becomes far more viable. Businesses don’t become unviable, but it is the debt load that becomes unmanageable.
Many of the issues are hanging fire for decades. Is the lazy public sector banking a hindrance in the development of financial markets? Even the so-called smart private sector seems to be dormant.
I honestly don’t think there is such a big divide between the lazy public sector banks and smart private sector banks. The intellectual calibre in the banking industry in India is quite high. The failure of financial institutions in the country has to do with the commercial imperatives... Private sector is very clear to focus on shareholder value. Very aware of their share prices and focus on the multiples they are trading. Imperative in public sector banks is not always very clear. Sometimes, it is assets, sometimes infrastructure... For the long-term sustainability, profitability has to be a motive.
Should the government bring down its holding below 51% for a better focus and enable state-owned banks to raise capital?
There is a difference between what is politically achievable and what is necessary from an economic perspective. I think control can be exercised at a commercial level of less than 50% as we have seen in multiple cases in Corporate India. The promoter group holds less than 50%, but influences the direction, policy and objective of an institution. It is more politically sensitive. It needs political courage. If you do the arithmetic, the government will have to direct resources away from its other priorities such as infrastructure, health and into banks if 50% has to be maintained. It should allow its holdings to come down. But that’s a very difficult choice.
Global factors seem to be turning against Indian corporates with higher US interest rates roiling markets?
The joker in the pack is your hedging costs. The differential in nominal rates would continue to be high for a while. The cost-benefit comes from hedging costs. As India gets into an easing cycle and the currency gets stable, hedging costs should also come down. RBI has been examining why hedging costs in India are elevated. India is going to be capital deficit for a long time, so it is not just about marginal costs, it is also about the availability of capital.
Recently, we had the court rule against corporates in the coal block case. How does it affect the corporates and banks?
Relative to other challenges banks are facing, I think it is not enough in itself to determine their fate. It is an incremental challenge for banks that have lent against these licences.
We have seen some deals getting announced, but many getting scrapped in the same speed. What’s in store for the Deal Street?
A significant part of Corporate India is heavily indebted. It will take time to get deleveraged. Mergers and acquisitions would take time. Capital raisings have to happen. They are over leveraged because they invested for an economy that was to grow at 8%. But the economy didn’t materialise.
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