Creating a Bad Bank by carving out "sad assets" of so many bad banks and making all these bad banks good again is a very old western world idea.
Sushil Kedia
Public sector banks today all together have a market capitalisation less than that of HDFC Bank. Markets have therefore concurred with the Prime Minister of India that the PSU banks have been eaten away by moths of corruption over decades.
What is the solution? Some out-of-the-box ideas. Here's a radical suggestion.
Creating a bad bank by carving out "sad assets" of so many bad banks and making all these bad banks good again is a very old western world idea. The rot will appear come at some point. Also, the headaches of tackling the bank staff unions would be a leviathan
How about creating one big bad company -- let's call it the Badmaash Company!
For theoretical purposes, let's call our company with an appropriate name: the New India Super Corporation Limited, or NISCL. Snatch away productive assets of errant NPA creating private enterprises above a large threshold and put them in as wholly-owned separate subsidiaries here.
All PSU banks will get equity shares in NISCL! This will result in immediate cleanup in NPAs from bank balance-sheets.
Offer the labourers, technicians, managers and executives employed in these "sad assets" employment at same terms with added ESOPs in NSCIL.
The new management of NSCIL be produced by inviting “bidders” from blue-blood corporates in the private sector that have an unblemished credit history. The five top industrial houses each having an equal stake of 5.2% each coalesce in to take control with a combined 26% stake!
This sale of 26% equity to consortium of a minimum of five top industrial houses creates additional cash into NSCIL with which immediate buy back of Equity held by PSU banks is done to give liquidity to PSUs & reduce equity exposure of the suffering banks.
Through a book building route a QIP may also be done letting Institutional Investors keen on taking equity exposure bid in to a book and those banks that are interested to have a further reduction of their exposure to equity may exit through this QIP right at inception.
A New India Super Corp ETF be created that will provide two-way market making on the bourses & list NSCIL immediately after this restructuring. A vibrant secondary market in the equity of the NSCIL will ensure that the private management consortium, as well as banks, have the potential to realize the upside through performance as well as other investors can price in through fair contest the ongoing market-evaluated value.
This ETF should be the vehicle for any funding from the government that it is envisaging for recapitalizing the banks. If the government keeps infusing direct equity into the banks repeatedly, we are only continuing to feed the Frankenstein that took birth with the bank nationalisation that took place in 1969.
The requirement for funding is much lower in the ETF vis-a-vis the requirement for putting capital directly into the malicious balance sheets of the PSU banks. The NPA crisis of India will then hardly draw any stretch on the fiscal management of its Government.
Even before we spend any thinking on de-nationalization of the banks again, this plan achieves de-nationalization of India’s sin of credit! Healthier banks then will regain market valuations rapidly in a few years and the government’s divestment plans can continue with rising pace achieving richer cash flows, too.
Such a super corporation will have extremely well diversified fundamental risk & will have zero financial leverage to begin with. By now, it would have been clear that this one stroke, would deleverage the errant corporates in India who are holding on to too much unserviceable debt and a poorly managed business asset. It will also remove unproductive credit assets from bank balance sheets.
The NSCIL would have the freedom to raise further capital for growth needs by taking public the respective wholly owned subsidiaries by listing them or working out new healthy debt with the banks on the sound principles of providing adherence to capacity, credit and covenant to all.
The entire system would be flush with a rejuvenation across the board. Such a solution is much more comprehensive in diluting away the systemic risk that is very heightened right now, more so without all the participants in the Indian economy neither acknowledging it nor having the opportunity to become fully aware of it.
There is a deepening stasis on the highway of credit running through the Indian economy. This one big bad company will make its most critical contribution by wiping out this stasis in a stroke. Money, machine and men are all productive when the mind is productive. Cleaning up this burgeoning stasis is crucial, now.
After initiation of NSCIL with the initial round of picking up assets away from large defaulters, on an ongoing basis, this concept can also have continued relevance.
For any of the banks coming up with yet other such NPA assets later too, a fair valuation bidding be done by NSCIL with any other suitors that are participating within the new legal frameworks of NCLT, Bankruptcy Code, DRT etc.
If a suffering bank and NSCIL will have a win-win equity swap deal workable the NSCIL can take on additional assets issuing fresh equity in itself at Market Prices to such banks in lieu of new assets.
History is full of endless examples, across the world, when the Lender of the Last Resort, i.e. the Government takes exposure at such mega-swindles. Such crises of confidence provide the ultimate upside and it is, therefore, the government, NSCIL and PSU Banks will have the final last laugh with this plan.
While this plan can only alleviate the pain of PSU Banks from breach of credit & not the breach of trust, we will have to tackle the off-balance sheet Nirav Modi-style LoU scandals separately. Undoubtedly with so much of therapy on bank balance sheets, they would stand stronger & more resilient in tackling that separate pain of breach of trust too.
Calamity is an opportunity, for some, and this government has shown it does not shy away from taking risks if the potential upside is high. The people of India should come together and place their conviction in a combination of our government and the top industrial houses with good credit history welcome should this move be explored.
Let us turn this wheel of misfortune grind upon us over decades and overnight into a new tryst with destiny.
Sushil Kedia is the Founder of Kedianomics, a markets’ research firm & also is the President of the Association of Technical Market Analysts