Some early recovery seen in roads, power: KVS Manian, Head - Corporate Banking, Kotak Mahindra Bank

The Indian economy is starting to see recovery, but a broad-based recovery will be visible only in the next six months, according to KVS Manian, corporate banking head at Kotak Mahindra Bank. He says banks are trying to clean up their books and ring fence them from over-leveraged corporate balance sheets, but this process may take some time. In an interview to ET, Manian says while he sees interest from distressed funds to buy assets, the banking system will have to suffer its share of pain before things change for the better. Edited excerpts:

Private sector investment is not picking up. Is there a lack of confidence?

It is not only confidence. If you see the last capacity utilisation data, it is at 60-70%. Nobody invests when you have 30-40% capacity unutilised. Between 2008 and 2009, everyone was extremely bullish, the V-shape turnaround happened, so huge capacities were built with phenomenal leverage. But now, since inflation is low, the value of that capacity is also not growing. I think the whole process of high leverage, huge capacity build-up and low demand has caused a huge amount of pain.

Are there any specific sectors where green shoots are visible?

One is starting to see early recovery. If you see the roads sector or the power sector, reforms have helped. Suddenly, the state electricity boards are more credit worthy than they were till UDAY scheme came. We are seeing some action already in the power sector, especially on the renewable side, some work has also started on roads. While I think, private investment has not come in, the government projects have taken off. I see government focus on the renewable sector, there is private equity money that is available in that space. But, I won’t say this is a broad-based recovery. Our guess is that in the next six months, you will see more broad-based recovery. I expect turnaround in the economy in the latter half of the year.

But what about over-leveraged corporates who have caused stress to bank books? When do you see that issue getting resolved?

Industry was facing a set of issues — under-utilised capacity, over-leveraged balance sheet — and these are not yet solved. It is still work in progress. For example, we have seen a transaction where some of the road assets of a weak company have been bought over by a fund. In some ways, this is consolidation, right? Atleast the weaker balance sheets are getting deleveraged. This is a process, it can’t happen over night, but, I think, the process has started. I think on the core industrial side — cement, power — this deleveraging has to happen, capacity utilisations have to go up, so it will take some time. This recovery will be a 1-2 years process.

Banks have been trying to use a variety of tools to recover money. Is that working?

The banking system has to figure out ways to deal with this. When strong hands will get hold of weak assets, I think, there will be sacrifices that the banking sector will have to make. Because these strong hands are not going to take over these assets at the same price. So, they are going to seek hair cuts. Some of these pains, the financial sector has to take. I see this as a process that will pan out over the next one or two years.

Do you see interest from distressed funds to buy stressed assets?

We will see more of that. For example, we ourselves have set up a special situations fund. And as investment bankers also, we meet many funds. A lot of them are not financial investors, they are willing to put in the money, hire the right kind of management and run the company, so all that is happening. This is a way of consolidating assets in good hands.