Wednesday, January 29, 2014

Shotgun weddings

Our nation is facing an unpleasant mess of bad loans of the public sector banks.  Public sector undertakings (PSUs)  have a lot of cash on their balance sheet and domain expertise in many of these industries. Banks are unable to find a way out of the mess. The private promoter are Abhimanyus who have no solutions to come out of the mess they have landed themselves in. They only knew how to go into this mess !

These promoters cannot raise any money as their share prices have rightly collapsed as the market has learnt about their modus operandi.  There is a market for the product or the service these assets produce but there are severe financial problems ailing these businesses.

The best solution would be a sale of the private company asset at debt value to the relevant PSU.
In case the value of the asset is lower than the debt, then the banks could sell these assets at these prices and could take some options on the PSU as part of compensation so that as these assets perform they could benefit. This way the losses that banks made would be recouped by the government through either the PSU or the bank.

This will also quickly add to the supply and remove shortages. There is a precedent for such as a move in the merger of Oriental Bank of Commerce with Global Trust Bank. It was simply forced on both the parties.  We need to similarly forcibly move the defaulter assets into well managed PSUs.

Coal and power assets would benefit greatly by this measure.

It will be akin to killing all of the following problems in one stroke

1) The problems of funding the losses of the banks will be solved. Instead of the banks taking the hits the promoters and investors will take the hits. Money saved in this regard will run in lakhs of crores and can be used for other nationally relevant projects.

2) Reforming crony capitalism: When promoters lose their companies and their share value goes to zero, all promoters in future will think a thousand times before they want to con a bank. Making example out of a few is the easiest and time tested way to establish fear of law.

3) Supply side problems in some industries would be solved - namely coal and power and this would spur economic development.

4). Investible company universe is shrinking rapidly in this country. Investment culture is dying as a result. Investors are scared that PSUs will mis-use the cash on the diktats of bureaucrats and ministers. If the PSUs were to use their cash to buy good assets at distress prices, this would remove the fears of the investors and actually substantially increase the prospects of these companies (see my earlier blog on PSUs). The listing of FERA companies in late 70s and 80 created an investment culture which was responsible for creation of many of your good companies.

5) If these problems are fixed the government would actually benefit from this crisis  in the form of higher valuation of the shares of the PSUs or banks.



8 comments:

  1. Did you know that what troubles me most of all bad loans are student loans? IIMA alumni included in the glorious list of defaulters. Among those are some very illustrious alumni! Not that I forgive the likes of Vijay Mallayya, but if it is the small guy, it is his problem, but if it is someone like VM, it is the bank's problem!

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  2. If we teach Mallaya a lesson, do you think IIMA alumni will dare to willfully default ? If a student defaults on his loan does it affect his CIBIL score ? He should logically lose his credit card, not be given a home loan and if he already has one he should be made to pay a higher rate on his home loan. Tit for tat is the most effective strategy in game theory. PSU banks take guarantors - they could go against them. Solutions are there. Will to do ??

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  3. The will is in all the wrong places Koushik and that is the problem.

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  4. bad behavior is from the hawker occupying the pavement to VM's occupying RS seats and everything inbetween, Various accountability guardians celebrate bad behaviour!! Forget the crops, we cant mend the fence...Solutions are always there as long as people think on your lines :)

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    1. See today Monnet ispat development. Promoters will be marked down to zero. https://m.economictimes.com/markets/stocks/news/lenders-want-18-in-monnet-ispat-against-10-proposed-earlier/articleshow/62439629.cms?utm_expid=.0_OyxuZnTFSZGUuoEBqhFQ.0&utm_referrer=https://www.google.co.in/

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  5. http://economictimes.indiatimes.com/news/economy/finance/infrastructure-firms-come-under-finance-ministry-scanner-for-over-invoicing-equipment-extra-money-shown-as-fresh-equity/articleshow/34445959.cms

    The above article gives evidence why the Shot gun approach should be used for bad infra loans.

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  6. Exemplary punishment is the only solution.

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